Government Banks On Micro Measures To Support Macro Economy

The Indian government on Friday said it would support the stressed automobile sector and front-load recapitalisation of public sector banks in order to revive some crucial parts of the economy. The government, however, stayed away from any large fiscal stimulus given the limited headroom it has.

Finance Minister Nirmala Sitharaman also promised to come back with more measures in the next few weeks to support the Indian economy and stressed sectors such as real estate.

Growth in the Indian economy fell to a twenty-quarter low of 5.8 percent in the fourth quarter of 2018-19, with both investment and consumption growth falling. Since then, high frequency indicators have suggested that consumption — India’s strongest growth engine — is flagging.

Pushing Credit Flow

One key lever for reviving growth continues to be pushing up credit flow. For this, the government announced the following measures:

• Front-loading of recapitalisation funds of Rs 70,000 crore for PSU banks, which could potentially enable credit flow of Rs 5 lakh crore.
• Banks will link their lending rates to an external benchmark like repo rate.
• Banks will pass on any reduction in the marginal cost lending rate to all borrowers. The two steps together will help bring down loan rates, said Sitharaman.
• The National Housing Bank will increase the refinancing support to housing finance companies to Rs 30,000 crore from Rs 20,000 crore announced in the budget.
• To speed up decision making at public sector banks, Sitharaman said, that the internal advisory committee will be allowed to take the final decision on whether a case is to be classified as a vigilance candidate or not.

Addressing Auto Sector Concerns

The automobile sector has been among the most strained with demand contracting and firms choosing to cut back on production and employment. To ease the pressure on this economically sensitive sector, the government made the following concessions:

• BS-IV vehicles purchased till March 31, 2020 will remain operational for the entire period of registration.
• Revision of one-time registration fee will be deferred till June 2020.
• Additional 15 percent depreciation on all vehicles will be increased to 30 percent. This is applicable for vehicles acquired between now until March 31, 2020.
• Both electric vehicles and internal combustion engine vehicles will continue to be registered.
• To boost demand, the government will lift a ban on government departments purchasing new vehicles. Such replacement will now be encouraged, said Sitharaman.

Attempts To Revive SMEs

The Finance Minister said that steps will be undertaken to ease constraints for small businesses. Speeding up tax refunds will be a large part of this.

• All pending GST refunds due to MSMEs as of the current date will be paid within 30 days.
• In future, all pending GST refunds for MSMEs shall be paid within 60 days from the date of application.
• The government will also amend the MSME Act to ensure a single definition for MSMEs. Changes to the Act will be taken up by the Cabinet soon.

Push For Infrastructure, Debt Markets

The government also said that it will focus on speeding up infrastructure spending.

• The government will ensure that delayed payments from public sector enterprises are monitored by Department of Expenditure.
• There will be closer scrutiny of arbitration awards and measures will be taken to ensure there is no risk aversion in lending to firms which have government dues pending.
• The government also said that the long-pending credit enhancement corporation will be made operational soon. This will enable infrastructure projects to raise capital at a potentially lower rate.
• The government will also discuss ways to liberalise the credit default swaps markets in India.

Is It Enough?

The measures announced by the government could help put a floor on growth, said economists.

“The first set of measures which will bring in a growth kicker should be the public sector bank recapitalisation, clearing of GST refunds and improving sentiments through the FPI route,” said Shubhada Rao, chief economist a Yes Bank. “These and the promise of more to come has been a pleasant surprise.”

The measures announced by the government should help address some of the constraints to growth, by boosting sentiment and addressing liquidity issues in some sectors, said Aditi Nayar, principal economist at ICRA. “Funds allocated already in the budget may be spent faster as well. Based on the pace at which implementation of these announcements takes place, we could expect a modest boost to growth in H2 FY20,” Nayar said.

Limited Fiscal Space

The government’s decision to focus on micro measures to support the macro economy comes against the backdrop of limited fiscal space. Ahead of the announcements, most economists said that India does not have much headroom for fiscal stimulus.

The government is targeting a fiscal deficit of 3.3 percent of GDP for the current year. That target, while marginally lower than last year, is considered difficult to achieve. Built into that target, is an expected gross tax revenue increase of 18 percent over FY19, at a time when the economy is slowing. Meanwhile, the revenue expenditure outlined for FY20 is 21.9 percent higher than the actual spends last year.

So far this year, gross tax collections have been weak. Between April-June, collections were at a 10-year low.

Sitharaman maintained that the tax targets set by the government are achievable. The measures announced on Friday, particularly the decision to do away with the surcharge imposed on foreign investors, will only lead to a revenue loss of Rs 1,400 crore, said the government.