There is evidence that the Government might be willing to reconsider some of the decisions in the budget and outside, which have virtually spooked the markets in particular and the economy in general. Following Nirmala Seetharaman’s maiden offering, markets reacted adversely. In July alone, foreign portfolio investors pulled out Rs 12,000 crores from the market. In the first few days of August, they have moved out another Rs 10,000 crores. In short, FPIs are net sellers after the disappointing budget. Intervention by domestic public financial entities has moderated the fall in the Sensex; otherwise it would have been far more than at present because there is no dearth of bad news on the economic front. Last week, it was reported that industrial production slowed to a four-month low, to 1.96 per cent in June against 4.55 percent in the previous month. Capital goods contraction indicated existing unsold inventory and slow demand. In fact, capital goods sector contracted by 6.48 percent in June; construction by 1.83 percent; manufacturing by over 3 per cent over the previous month. On the other hand, rupee has come under pressure in recent days, thanks to the pull-out by FPIs and the creeping economic slowdown.
Major companies have reported losses in the last quarter. Vodafone-Idea reported a huge loss whereas Airtel for the first time reported a lack of profit in the last quarter. Key sectors of the economy are saddled with huge unsold inventories, be it auto, real estate, steel, cement, etc. Trouble is that even RBI’s successive rate-cuts have not helped prevent the slowdown and in boosting demand. Banks are saddled with funds for which demand continues to be sluggish. Not a day passes when either through SMS or tele-marketers one is encouraged to borrow a sizable amount at competitive interest rates on long-term repayment plans. Even household durables, including expensive cell phones, are being marketed on easy, no-interest equated monthly installments. Yet, the off-take of these goodies is rather dismal. In short, the economic sentiment is negative all around. From ordinary people to captains of industry and commerce feel weighed down by the fear of an economic recession with shrinking incomes and growth. Lack of demand in the economy can also torpedo government’s plan to raise Rs 1,05,000 crore from disinvestment. In a bear market, there may not be buyers for the shares of the public companies earmarked for disinvestment in the current fiscal. Purchase of equity in disinvested companies by public financial institutions, including LIC, would mean nothing. It is a mere paper transaction from one arm of the government to the other. The real challenge, therefore, is to spur demand. This can be done by easing impediments in the way of growth and by putting more money in the hands of consumers. The latest budget does neither.
Now, it seems, the Finance Minister has begun to consult the relevant economic actors in order to take the sting out of the budget. Last week, she met the representatives of the FPIs who spoke in unison about the negative impact of the increased tax liability on them. Again, she is said to have been told how her move to criminalize the default in fulfilling corporate social responsibility obligations has dismayed company boardrooms across the country. Even the increase in corporate tax for the top bracket has not gone down well. Over forty-two percent tax when the promise was to bring it down to the prevailing levels in the South-East Asian countries of 15-20 percent does seem excessive. Aside from the industrial and financial sectors, real estate is a major contributor to the economy. There is nothing in the budget to revive it. Here again, Seetharaman has now agreed to meet the representatives of the real estate sector to hear out its woes. According to reports, a special fund to help developers complete projects languishing for want of money has been proposed. Debt burden of the real estate sector is so huge that a large number of builders have declared bankruptcy and shut down operations. As a result, tens of thousands of middle class investors in the so-called affordable homes sector feel cheated.
The Finance Minister might have to take a call on the creation of special fund in order to help completion of abandoned projects. In several ways, the faltering economy poses a real challenge to Modi. His management of politics cannot be faulted insofar as he has demolished all opposition before him. But a bigger challenge is the economic slowdown. Unless Modi devotes time to the economy the gains from a successful management of politics can soon be lost due to a troubled economy. Politicians are usually good at managing political challenges. For managing economy, they need outside expertise. It is time Modi realized this, and co-opted some top-notch economic professionals to help check slowdown and boost growth.
- S Sadanand