ANOTHER STIMULUS – A FEATHER IN THE STORMY WINDS

Usually, it’s Friday evenings. But this time the FM, Nirmala Sitharaman sprung a quick surprise, calling for an impromptu Press Conference on Saturday evening. So all those who were left wondering why the Friday was missed, there came the answer!

So the FM announced some more sops, this time directed towards pushing up exports and picking up the down-in-the-dumps real estate sector. A quick look at what was announced:

• Govt to provide a Rs 10,000 crore special window with an aim to help complete ongoing affordable and middle-income housing projects.
• A new scheme introduced - Remission of Duties or Taxes on Export Product (RoDTEP), to incentivise exporters at an estimated cost of Rs 50,000 crore to the exchequer.
• India will hold annual mega shopping festivals like Dubai Shopping Festival.

Well, this was the third round of so-called stimulus but looking at the way in which the market has given this a complete cold shoulder, clearly, it has not worked. In these three rounds, the FM has addressed the issues of the falling demand in the auto sector, wooing the FIIs by rolling back certain Budget announcements, merging PSU banks and this time around trying to address the issues of the realty sector and falling exports.

If one looks at it from outside, the industries targeted by the FM are right; these are some of the worst affected sectors. But despite all these pushes, the underlying fact remains that overall demand is weak and the biggest problem for both exporters and realty are supply-side bottlenecks. And that has not been addressed at all. Once again, a band-aid over a cut artery, which means it is highly doubtful that this third round of stimulus will help revive these flailing sectors.

It is very shocking that some people are saying that these stimulus packages indicate that the Govt is at least admitting there is a slowdown. But isn’t that the problem itself; that the Govt stayed in denial for so long and allowed the economy to get where it is today. The economy is facing cyclical as well as structural issues and by giving only fiscal or tax reliefs, the problems will not be solved. The Govt is obviously of the thought that these measures along with persistent rate cuts from the RBI will help overcome any economic slowdown.

But isn’t this the same Govt which promised radical structural reforms in 2014? No major supply-side reforms have been carried out like land and labour reforms, which are crucial for any form of economic growth. Just increased spending will not revive growth unless the structural issues are dealt with.

The Govt is virtually ruling the country as a single party with almost no opposition. So it is very difficult to fathom why it cannot push ahead with the long-pending and much needed structural reforms as promised?

The capacity utilisation of the economy has been around 75% for the last several years and unless this rises, fresh investment would make no sense as it will lead to pushing down the capacity utilization down, impacting profitability as capital will be underutilized. Why is it that when the stock markets touched the stratosphere in June investment rates still did not rise? Monitoring Indian Economy Pvt. Ltd data shows that investment proposals are currently at a 14-year low and this is despite RBI cutting rates four times, totaling more than 1% in the last one year.

The Govt needs to understand that the crux of the problem is the unorganized sector – after the demonetization and GST, back-to-back, the sector is completely maimed. This sector producing 45% of the output and employing 94% of the workforce, has been in decline, which is pulling down the rate of growth of the economy. And when the growth figures are calculated, data from the unorganized sector is collected only over 5 years and the rest of the time, the organized sector numbers are taken as proxy for the unorganised sector.  Maybe the Govt could have paid attention to other pointers like decline in work force and rise in demand for work under the Mahatma Gandhi National Rural Employment Guarantee Act. All this in itself suggests that the unorganised sector has declined by at least 10% and if this had been taken into account, the growth of 5% which we see today would actually have come in much lower.

Now the question is – who will make the Govt aware of this and urge them to stop putting band-aids and instead concentrate on an open heart surgery.