An Open Letter to the Finance Minister of India
Updated: Aug 28, 2019
It would indeed be rather presumptuous of me to assume that I would have to draw your attention to the current state of the Indian economy. While I am aware that you are taking measures to revive the fledgling state of our economy, supposedly one of the fastest-growing in the world, I, as an ordinary citizen of India cannot help but be extremely perturbed by the situation at hand. Despite my anxious concern regarding the future of our economic growth,
I must congratulate you for finally stepping up to address the trouble that has long been brewing under the surface and thank you for announcing a set of new decisions to remedy the problem.
However, at the same time, I cannot help but be afraid that they might not be enough to account for the structural and cyclical elements inherent in the deep-rooted problems of our economic reality.
As for the stimulus measures that have recently been announced, I must particularly laud the decision to finally get rid of the angel tax, a seven-year old monstrosity that had seriously impeded a faster growth of the startup culture. While I have my doubts about the adequacy and effectiveness of withdrawing the surcharge on FPIs now, there is no doubt that it will boost the Indian position on an international level, with the G7 convening around the same time.
Yet, I do see a lack of strategic planning with regard to the measures taken with regard to the country's automobile industry, which is seen as one of the very pillars of our economy. Seeing that it has been facing one of the worst downturns in history, it seems inadequate that the government should only offer to buy new fleets for itself and clarify that BS IV vehicles will continue to be operational for the entire period of its registration. Especially considering that the industry has seen 36% slump in sales for the month of June, the measures just do not seem to be enough.
Despite the clarification with regard to BS IV vehicles, the industry is likely to suffer with the management of piling inventory. Even as the festive season approaches, the new measures can be relied upon to do little for reviving the demand side of the economy, especially as the announcements do almost nothing to alleviate the issue of depressed consumer incomes.
As in the case of reduction in the rates of bank loan interests, I was disappointed to notice that it was not announced on a retrospective basis. That, in itself, calls to question whether it will help at all, seeing that the new policy will only bear fruit in the next financial year, given that the RBI is being left with very little wiggle room to carry forward the effects of such a decision.
Speaking of leaving inadequate wiggle room to the apex bank for weathering future storms, the centre's decision to accept the surplus transfer worth 1.76 lac crores might also portend adverse ramifications in the long run. Since the central bank had enjoyed high dividend receipts lately, it was not all that unexpected that the centre would receive a payout to alleviate its fiscal stress. However, what does raise questions is the decision to go forward with a one-time payment, as recommended by Bimal Jalan committee. This reduces the RBI's contingency fund availability by a significant margin, leaving it little room to play with if it should have to step in and come to the centre's aid again, or simply use the funds to inject the economy with a timely boost.
The surplus transfer also leaves further concerns for the future in its wake.
Given that such a massive amount has been approved for a transfer from the contingency fund, the buffer for future transfers, especially in the next fiscal year, has been lowered. If the balance sheet does exhibit a trend of robust growth, the central bank might be needed to transfer some of its earnings to the contingency fund next year so that the 5.5% threshold may be maintained. This, in turn, will also take away a chunk of the surplus that could have accrued to the centre otherwise.
Leaving aside the question of announcements that you have already made, it is perhaps best to move forward and explore the possibility of solutions that you will hopefully take up in your future announcements, two of which you have already scheduled.
An imperative aspect of boosting the sagging economy is the creation of ample jobs.
On this matter, I would have to agree with a recent FICCI report that focuses on the MSME (micro, small and medium scale enterprises) sector for the creation of gainful employment. Considering that the sector has already generated nearly 14% of all the jobs created in the past four years, it makes sense to turn your attention to this side of our economy, to make sure the benefits of large-scale policy decisions trickle down to the lowest of the country's economic strata. Fostering the development of these MSMEs on a cluster model is expected to boost their efficiency by leveraging economies of scale and is also likely to enhance productivity by infusing the sector with a much-needed dose of competitive spirit.
Secondly, an essential element to revive the economy is to ensure that people begin to spend more on consumer durables, especially automobiles, an industry that is clearly in a sorry state.
Just like calcium cannot be absorbed by human beings without the aid of Vitamin D, it is unlikely that your measures for the revival of the automobile industry will show results unless paired with a significant boost to consumer spending. Without people choosing to buy the vehicles in the first place, the industry is doomed to being stranded in a situation not much better than the one it is in currently. The government can potentially start with affecting the purchasing power of its own employees, especially since most of them are assured of a significant amount of stability with regard to their jobs and income assurance.
The demand side of the economy, which seems to be a critical source of the problem, can be encouraged by incentivizing the purchase of major consumer durables.
For example, a suggestion is to waive off or lower interest rates on the money government employees decide to borrow from the Employees Provident Fund Organization (EPFO). Considering that it is a part of the money that technically belongs to the employees themselves, a waiver is less likely to affect the government's own fiscal standing and will also boost consumer spending in both the short and long runs.
A tax cut on decisions to buy major consumer items during this fiscal year can also be a way to encourage a greater deal of spending and result in a rightward shift of the macro demand curve. While a tax cut may seem infeasible since it would lead the government to lose out on some direct tax receipts, it would be worthwhile to note that it will eventually enhance the state's indirect tax receipts.
Agriculture is another area that can benefit from careful economic strategizing. The Indian scenario is now marked by direct payouts to farmers or subsidised farm credit. While these are laudable measures in theory, they have resulted in the creation of a class of rich farmers who have turned into moneylenders perpetuating an exploitative relationship with the poorer peasant class.
An interesting way of remedying this issue might be to provide subsidized payments instead of direct cash payouts.
Alternatively, policy decisions should be geared towards handing the reins of the fast-growing food economy back to the farmers themselves. Along the lines of the American farmers' market model, it may be a good idea to encourage, through direct cash transfers, buying in settings where only farmers are selling. This will help strengthen the foundations of the economy and help us reap long term benefits.
A push towards faster urbanisation of the country will also help amplify the growth drivers of the economy: generating jobs, creating new opportunities and boosting consumption capabilities.
Furthermore, on the policy spectrum, consolidated ideas on the recovery of non performing assets, and gradual disinvestment by the government in all but essential services would be worthwhile ways to deal with the root causes of the long-standing economic problem, and not just its symptoms.
Madam, I am sure that you and your advisors are committed to get our economy back on track as soon as possible. These are only a few humble suggestions from a common man of this country, hoping that you will explore the possibilities of strategizing on the issue better, so that investment professionals like myself have one less thing to worry about!