Crisis confounded: FM’s third set of  incentives too can’t stimulate growth
News analysis

Crisis confounded: FM’s third set of  incentives too can’t stimulate growth


Finance Minister Nirmala Sitharaman's response to the economic crisis at the third media briefing in as many number of weeks has certainly not inspired any level of confidence.

If it was reviving the automobile sector and improving the condition of State-controlled banks in the two earlier rounds of media briefing, this time it was the exports and housing sectors that was in the focus.

While the first two refused to enthuse any sector, the third too tread the similar track. And a reform package that the economy waits for urgently does not seem to be anywhere near as the Government fails to accept the fact that there is a serious economic crisis.

It has to be accepted that growth has been weak and equally patchy. Attempts to look at the reasons behind them do not appear to have been made. The Finance Minister at the briefing refused to accept the fact that there was a slowdown. What the economy needs is structural reforms and not mere fiscal reliefs.

It was only last week that the International Monetary Fund said India's economic growth was "much weaker" than expected due to "corporate and environmental regulatory uncertainty and lingering weakness" in some non-bank financial companies.

Five consecutive quarters of growth drop, exports falling for the second time this fiscal and imports dipping for the third consecutive month, the scene is bad even if the government and the Finance Minister refuse to acknowledge it publicly.

Commerce Ministry data showed that merchandise exports declined 6.05 per cen in August and imports 13.45 per cent. This may have narrowed down trade deficit to $13.45 billion. But to add to the worries has been the sudden spurt of oil prices after the recent drone attack on two Saudi Arabian oil facilities. This is expected to have a 5 per cent drop in oil supply. Already, markets opened on Monday and the price has breached the $70 a barrel mark. This rising oil price is going to hit Indian economy harder.

The drop in commodity prices partially hit overall activity but there has been the slackness in domestic demand. It has to be acknowledged that demonetisation was an uncalled for self-inflicted economic wound that has hit small time trade hard.

On boosting exports, the Finance Minister announced remission of duties or taxes on export products, replaced an old scheme with a new one, which will cost the Government Rs 50,000 crore, promised higher insurance to cover working capital loans for exporters and said real-time electronic processing of GST refunds would be in place this month itself.

These measures could certainly help growth of exports, though in the long term.

But like several pronouncements, including the one on preference of the millennial generation for app-based cab services, the one of a Dubai model shopping festival to boost trade appeared nothing more than a knee jerk reaction.

On the housing front, the major announcement was a Rs 20,000 crore window, where the Government will put half the amount and various agencies the remainder, for completion of affordable housing projects. This, she said, should help around 3.5 lakh units that are out of NPA and NCLT. It is estimated that there are over 14 lakh units without takers, bleeding banks and the realty sector.

None of the three packages has dealt with the crux of the matter. The issues at stake are the lowest GDP growth in six years, the highest unemployment rate in decades and the most difficult liquidity scenario for the first time in 70 years. This explains why the Niti Aayog vice-chairman had to say that the government would have to take unusual steps.

To add to all these has been the stagnant real wages which has also contributed to sluggish consumption.

What the Government needs to look at is writing off farm loans and pumping more funds into the agricultural sector and also look at land reforms as also those on the labour front.

It would be advisable for the Government to look at how lynching has affected the big cattle trade in the country.

One among what the Government interpreted last time as a reform was the merger of PSU banks which was nothing more than a commercial decision. Very recently former RBI governor YV Reddy said global experience was that only half of all bank mergers had been successful in terms of their original intention, which should be “to obtain operational efficiencies”.

The Government's turning away and not accepting the fact that there is a slowdown and treating the whole crisis as cyclical and going in for a few incentives will not resolve matters. It will have to look at addressing core issues and taking steps to boost real growth which for the last three weeks has not come from any of the three briefings by the Finance Minister.