Economy recedes with poor timing of policy changes

The years of 2014-19 are representative of several measures taken by the government to make it easier to do business. There were a plethora of reforms aimed at making the paths clearer. This reflects partly in the better ranking that the country achieved in the World Bank’s ‘Doing Business Index’ and WEF’s ‘Global Competitiveness Index’.

Two major reforms however pushed the economy back. While demonetisation was a major failure, GST was necessary and would take time for it to work and the benefits to show.

The slowdown in the economy has been recognised officially now and at this crucial stage some policies have pushed the industry back further. While conceptually the reforms may be sound, the timing is not right. Let us see which ones are responsible for the decline in the business sentiment.

The Budget was expected to give several incentives to the industry but these did not quite pan out as the government preferred to walk the path of prudence. In the quest to garner more revenue from existing players as it has been unable to expand the canvas of the taxable base, the super-rich tax has been introduced.

The move did not appear negative but the FPIs, that are a dominant factor in the stock market, getting clubbed under this taxable base has caused a major setback to the equity market.

This has also eroded the domestic investor sentiment as it comes as part of a series of measures that were introduced in the last six years, starting with taxing debt that has been held for more than one year to the LTCG on equity and equity mutual funds last year.

Clearly one can see the pattern here of how the stock market was targeted for additional revenue. While collections are not significant, the impact on the market has been perverse.

Another reform pertains to the so called tax harassment of corporates. With the IT officials being put in a tight spot on revenue collections which have shown few signs of buoyancy, there has been a tendency of the officials to go overboard in going after companies for tax payments.

While getting companies to pay the right amount cannot be contested, it has swung to an extreme of harassment which has led to some casualties. The government has taken note and speaks of converting to a more tax-friendly regime.

The more recent move to make corporates more responsible for CSR targets with an associated criminal action was the last straw in a way, though hopefully this will be diluted to civil liability only.

It is crooked that the government is after India Inc. to step in and fulfill the responsibilities of the state. With the law in place, a lot of corporate attention should now be directed towards social work lest it invite the wrath of the government.

While there is merit to the regulations in the automobile sector, they should have factored in the current status. The sector is probably going through its worst phase with decline in sales for the last 5 months.

Regulations to encourage electric vehicles, increasing the registration charges along with higher insurance fee works against them. Producers are grappling with meeting the future norm on electrification while potential purchasers have been pushed back with the overall increase in prices.

Bankers have been made uneasy. They have to now address the issue of sending companies to NCLT and IBC as per the latest RBI circular on bankruptcy. In its absence there has to be higher provisions made.

The overemphasis on lending to SMEs and the orders passed to the PSBs can be daunting and lead to imprudent lending. These may lead to NPAs in future. With PCA, NPAs, capital requirements already being major challenges; such forced lending increases apprehension in the minds of bankers.

Sixth, the Budget spoke of sovereign bonds being issued overseas. While there is nothing amiss in having such an issuance or a review against it, the resulting uncertainty has caused the market to react perversely. GSec yields have increased post monetary policy even though the repo rate was lowered by 35 bps.

The current economic scenario demands better coordination across various ministries and organs of the government to remove uncertainty and provide more direction to the government’s change in policies.

The take-away being that care has to be taken not to upset the apple cart, no matter the importance of the reform to prevent exacerbation of the current situtation.

Madan Sabnavis is chief economist, CARE Ratings. The views are personal.

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