A first step to revival

Measures by FM welcome, but more would be needed

Finance Minister Nirmala Sitharaman on Friday announced a large number of administrative and tax changes aimed at reviving India’s stalled economy. There was clearly a need for some such course correction by the government in view of the slowdown. However, the fiscal space for a counter-cyclical stimulus simply did not exist. It is a relief that the government has been cautious about extra spending, and has focused on measures with limited fiscal impact. The government’s willingness to listen and its acceptance of the fact that there are problems in the India economy are also welcome.

The contents of the package combine both sector-specific and more general measures. Perhaps one of the most important was the announcement that pending goods and services tax (GST) dues to registered  micro, small and medium enterprises (MSMEs) would be cleared in a strict timeline — 30 days. Further, in the future all newly raised dues would be cleared within 60 days. This will hopefully ease some of the working capital stress being faced by the employment-generating sector. The government has also sought to grease the wheels of the financial system, which has been choked up following the stress in public sector banks and the collapse of IL&FS. Bankers have been provided with some protection from overzealous vigilance inquiries; and the capitalisation of public-sector banks, already provided for in the Budget, will be front-loaded, which, the government hopes, will provide them some growth capital. The automotive sector, which has seen its worst year in decades, is being given some relief — though not through the tax cut they have sought. Instead, the government has postponed the implementation of a higher registration fee, and has clarified some regulatory uncertainty that has hit the sector.

Some recent decisions have been wholly or partially rolled back. For example, the minister reiterated that the finance ministry was not notifying the section of the legislation that criminalised violations of corporate social responsibility rules. This should never have been passed in the first place. The hike in the income-tax surcharge, which has affected a section of foreign portfolio investors and created panic in the market, has also been partially addressed. The government should have completely rolled it back because it will create complications in the tax structure. Overall, however, many of these changes are welcome, particularly the finance minister’s stress on protecting wealth creators and increasing the transparency of tax demands.

These measures indicate that the government has emerged from a state of denial and recognised that the Indian economy faces serious problems. Moreover, it is willing to address these problems — at least the cyclical ones — without disturbing the fiscal balance.

However, the deeper structural questions still remain unaddressed. The need is to raise productivity and investment to a higher level. This will require more spadework from the Union government, which will have to invest political capital in working with the states to clear pending factor market reforms. The government has shown its commitment to addressing the economic slowdown; now it must follow through on structural reform.