Sans tax cuts or sops, can FM Sitharaman's confidence-building measures remedy slowdown blues

A projector malfunction briefly flashed the title of the finance minister's presentation "Measures to Achieve Higher Economic Growth" even before Nirmala Sitharaman arrived at the venue for her much-awaited press conference. The excitement that was already building up, soared as expectations of an economic stimulus seemed imminent. But that was not to be.

Instead, retracting ill-conceived steps, introducing confidence-building measures, liquidity enhancement, commitment of interest rate transmission and a lot of promises for infrastructure, home buyers and automobile sector dominated FM Sitharaman's announcements. But the FM stopped well short of any tax cuts or sops - the primary demand of the industry to kickstart the consumption cycle.

That leaves a question: are these measures enough to revive the fast sagging economy?

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Sitharaman began on a defensive note, reasoning that India is affected as much as the world is impacted by a slowdown. But promptly moved to make the big announcement retracting the ill-conceived higher surcharge imposed in Budget 2019 on foreign portfolio investors. What would have been a measly Rs 1,400 crore gain for the Centre ended up spooking foreign investors and destroyed lakhs of crore of investor wealth since the Budget announcement.

The other big retraction to exempt startups registered with the Department for Promotion of Industry and Internal Trade (DPIIT) from angel tax was long expected and the Centre had already moved in that direction through announcements in the Budget.

These were, perhaps, meant to send a message to the G7 Summiteers--who congregate in France tomorrow for the 3-day deliberations--that India cares for foreign investors. It was better late than never. Both these measures will be welcomed by the stock markets Monday morning.

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The two major liquidity enhancement measures-Rs 70,000 crore upfront infusion into public sector banks and an additional Rs 20,000 credit support to the SMEs-will surely pump more liquidity into the economy, especially for SMEs. However, the hope that PSB funding, already announced in the Budget, will create between Rs 4-5 lakh crore of additional lending and liquidity may be dashed for two reasons. One, industry isn't exactly lining up to borrow and invest lakhs of crores in new capacities since their existing capacities are already lying idle. Two, much of this money could well go into filling the hole in PSBs' balance sheets created by the ongoing aggressive write-off of non-performing assets.

FM Sitharaman's announcement that banks have agreed to link interest rates to repo rates will have limited effect on consumer and corporate interest rates if it is only prospective--which it is likely to be. After all, in the past 4-5 years, repo rates have been cut by 2.6 per cent while banks have only passed on 1.1 per cent to the borrowers. Unless full transmission of the past rate cuts happens, this is a futile exercise because with repo rate already down to 5.75 per cent now, RBI has little room to make any more drastic cuts.

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With automobile demand shrinking for the 12th month in a row, it managed to catch the FM's attention who exceeded the industry's demand to raise annual depreciation for purchases this fiscal from 15 per cent to 25 per cent. Sitharaman allowed 30 per cent depreciation instead. This directly helps the transport sector, logistics, ride-hailing firms to replace old vehicles with new ones. Allowing government departments to start buying cars will have limited effect, however, clarification regarding deferring of registration fee, continuation of IC engines and EVs in parallel allowing BS-IV vehicles to be operational for entire registration period were much-needed. Industry can also look forward to a scrappage policy in the future. But GST cut from 28 per cent to 18 per cent as demanded wasn't forthcoming.

Besides these, everything else was more of the nature of confidence-building measures - some old, some new. While anti-tax terrorism measures such as digital, faceless tax filing and demand raising have been announced, setting a fixed timeline for pending GST refunds will be widely welcomed. As of June-end, Centre was still to clear nearly Rs 75,000 crore worth of GST refunds. That they will be cleared in 30 days--and all future refunds in 60 days--will bring certainty to a lot of businesses.

ALSO READ: FM Sitharaman assures EMIs will get cheaper; banks asked to link home, auto loans to repo rate

An inter-ministerial task force for Rs 100 lakh crore investment, credit enhancement for infrastructure and housing sector, simplification of bond markets, auto scrappage policy and something to look forward to for the home buyers have been committed for the future.

But no slowdown in the world has been surmounted without the government taking the lead and taking a blow to its finances. Tax cuts are a must to leave disposable income in the hands of individuals and investible surplus in the hands of businesses. The earlier the Centre realises this, the quicker will be the turnaround. After all, we've already wasted a year waiting for the elusive private investment cycle that government is so dearly looking forward to.