Dear FM, here’s a 12-point guide from D-Street to pump-prime the economy : 08-08-2019

The economy is going through choppy waters as can be seen in auto sale numbers, I-T collections, stock market carnage and management guidance coming with June quarter results. The economy went through Samudra Manthan in the past few years. There is no Mahadev in Kalyug to bear the poison, which has come out before the intended amrit, hence we have to bear the same in form of subdued growth. 

Bank lending to corporates is more or less without external influence, which will result in lower future NPAs. Banks are better equipped to recover NPAs, as the IBC has created fears among defaulters. Fiscal discipline, including off-budget borrowing, is reflected in the journey of inflation from double digits to lower single digits. 

Subsidies are reaching targeted recipients more efficiently. Tax compliance has improved. RERA has cleaned up the real estate sector. All these reforms have come with an adverse impact on growth, but is worth bearing as it builds a stronger foundation for future.

Just as a few extra pinches of salt negate the effort of the chef in preparing food, few actions have spoilt the taste for investors and entrepreneurs. Those few steps that hurt investor sentiment are the levy of LTCG on equity despite STT, the income-tax surcharge on FPIs, bid to increase minimum public shareholding of listed entities, higher margins despite lower volatility and suspension of derivatives settlement, among others. 

The Indian entrepreneur is Kalyug’s Abhimanyu. He is born in the Chakravyuh to not only fight the Kauravs (market and competition), but also with the Pandavs (lack of credit, high real interest rates, high tax burden, complex regulations, infrastructure bottlenecks etc). It is important for the Pandavs to support Abhimanyu to break the Chakravyuh. We must create the environment to accept genuine business failures. 

Following steps, which by no means are exhaustive, are needed in totality and in rapid succession for a turnaround in the economy. 

1. We need to prioritise growth over fiscal prudence and inflation control. Higher growth will tackle inflation with additional supply and fiscal concern with higher tax revenues. It is better to increase the size of the pie and take a piece than take a bigger piece from the existing pie. 

2. Growth can’t happen without money. Our domestic savings are down by more than 8 per cent over the past decade. We have to access global capital for faster growth. With more than $13 trillion of debt in negative yield, we are at a most opportune moment. Instead of FPIs coming for registration in India, we should reach out to them and invite them to invest by giving licence to Invest anywhere in India. Removal of the income-tax surcharge on FPIs will be a positive gesture to improve sentiments. 

Giving FPIs certainty on tax aspects by a decade of policy holiday will be a gamechanger. Essentially, give FPIs “suswagatam’ treatment, which Tata Motors got at Sanand, while relocating the Nano plant. While getting FPI flows should be taken care of to attract long-term flows, becoming a part of the Global Bond Index will be a good way to attract long-term debt flows. Invest foreign debt in capital assets to tackle valid concerns raised by wise people. 

3. Tight liquidity prevailing in the banking system since many quarters has become positive from May 2019. The market must be assured of liquidity for a long period. Around the same time last year, interest rates were raised proactively by 50 bps in two parts to control inflation. Cutting interest rates proactively in large quantum is necessary to support revival of investment. 

4. Transmission of credit is severely constrained with guidelines like PCA, LCR norms and NBFC crisis. Give budgetary allocation of Rs 70,000 crore to PSU banks today itself. Finalise Dr Bimal Jalan Committee Report to get additional growth capital for PSU banks for transmission of credit to accelerate. We can learn from US Fed, which is managing 7 times bigger economy with less than 6% of reserves held by RBI. Ignore those critics who clap when US announces TARP for their troubled financial sector but advise us not to intervene to help our troubled NBFCs. Launch a TARP equivalent for the troubled NBFCs, including equity infusion to take majority control and make the managements accountable like the US did during sub-prime crisis. 

5. Launch focused programmes on the lines of Operation Milk, which made India world’s largest producer of milk, to settle issues of real estate, automobile and SME sectors. 

6. Our trade deficit with China was more than $55 billion last year. Dumping from China is converting our manufacturers to traders. Control trade deficit with China by saam, daam, dand, bhed to support local manufacturing. 

7. We spent $22 billion for import of coal last year, despite having third largest coal reserves in the world. On a war footing, remove all the constraints including judicial requirements from the path of our entrepreneurs to mine coal and other natural resources. Create jobs in Jharkhand, Chhattisgarh, and Orissa rather than in Indonesia and Australia. 

8. We spend tens of billions of dollar for travel and for educating our children abroad. Bring Harvard to India, rather than sending our kids to Harvard. ISB and Ashoka University have shown us the way. Unnecessary travel like taking distributors for joints abroad needs to be discouraged. Encourage industries for local travel instead of global travel. 

9. We spent $9 billion in import of broadcasting equipment. Encourage global manufacturers to set up plants here with the lure of preferential access to domestic market on a forex neutral basis. Not only will jobs be created locally, but also precious foreign exchange will be saved. From Apple iPhone to Xbox, there is a big list to capitalize upon. 

10. Many companies are migrating out of China due to the tariff imposed by the US. We must target them through large buyers like Amazon and Walmart, which have set up bases here. Set targets and rewards like the private sector for such efforts. 

11. Multiple levels of taxation on corporates viz. Income-Tax, Dividend Distribution Tax and Tax on Dividend Income need to be brought at par with peers. This tax collection process has resulted in capital flight with thousands of millionaires relocating from India. Capital flight needs to be reversed with better tax collection process. 

12. Apart from lower rates and adequate credit, entrepreneurs need policy predictability. While we need to be aspirational about developed world standards like low pollution and electric vehicles, we need to keep in mind our emerging market income levels. Aspiring for developed world standards will make products and services unaffordable for most Indians. 

The government has no business to be in business. An incredible set of talent and assets remain underutilised in PSUs. The government is giving away economic ownership and keeping managerial control through current method of divestment. However their success in divestment has come when it has kept economic control, but given away managerial control. Hindustan ZincNSE 1.42 %, Axis Bank and Maruti are stellar examples of the same. The list of PSUs for strategic divestment is long from Air India to SAIL. Few strategic divestments will convince the market on the government’s commitment to reform path. 

We are lucky that crude oil prices are soft despite the US-Iran skirmishes and the monsoon is normal. Singular focus on growth, availability of money, respect for market and encouraging entrepreneurship will remove the excess salt to make the food palatable. 

Source : Financial Express

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