October , 2019
12:31 pm

Dr. H. P. Kanoria

Dear Readers,

Globally, Bharatwasi celebrate the homecoming of mother Durga, mother Lakshmi, and mother Swaraswati, and the victory of the Goddess over the buffalo-demon Mahishasura. This is a symbolic victory of good over evil. Family and friends celebrate the virtues, values, divinity, harmony and peace of Mother Durga by imbibing these qualities.

World: OECD said that the trade conflict has pushed down global growth. Governments are not doing enough to prevent long-term damage. The manufacturing sector has been hit hard. The German economy is suffering the highest downturn in seven years due to a manufacturing slump. For the Euro area as a whole, manufacturing activity shrank.

Economy: Concerned with the slowing economy, falling GDP, increasing unemployment, and fundamentally-damaged economy, Modi’s government has been taking many shrewd measures, which appear to be good. More practical measures need to be taken.

NBFCs: Several announcements for reviving and supporting NBFCs have not been implemented. Liquidity crunch is persisting. Major needs are: a) change the perception of people about NBFCs, b) allow NBFCs to accept deposits from public, c) allow NBFCs to convert into banks or merge with existing banks,  and d) allow them to buy back their own NCD from retail investors. Investors are selling at a discount in panic though assured of 100% full amount on maturity with higher rate of interest than that of fixed deposits and other investments.

Government has directed banks and NBFCs to jointly hold public forums for distribution of loans to needy segments of society. RBI’s Governor advised bankers to take larger haircuts to resolve stress in NBFCs. RBI has already given power to bankers. Banks and mutual funds have reduced lending to NBFCs creating a cash crunch and forcing them to sell valuable assets at low per prices. NBFC securitisation norms need to be relaxed or amended. Cost of funds is increasing. Margin is reducing. Business is falling.

Real Estate – Housing: BE had earlier reported that crores of finished built-up flats in all categories – luxury, upper class, middle class and affordable - are lying unsold. Bharatwasi-s do not have surplus money to buy, even those who have surplus funds are reluctant to make big-ticket purchases keeping in mind the looming economic uncertainty. The cost of flats is also very high, despite such large inventories. Government’s announcement of allotting Rs. 20,000 crore for unfinished houses is not going to work and help. Who will take loan and invest with greater risks, which also involve punitive measures like going to prison?

The need is to create surplus saving among Bharatwasi by reducing personal income tax rates, reduction of GST on raw materials and housing, and reducing registration charges. Housing sector can be the largest employer. Every house of 20,000 to 30,000 square feet employs a minimum of ten to fifteen persons.

Power Sector: Despite having the world’s third largest reserves of coal, India is importing huge amounts of coal. In 2018-19, it imported 233.56 mt. of coal, which is 8.8% more than the import of 2017-18, that too, at a higher price denting the foreign exchange reserves, affecting employment and regular supply to power sector. Generation companies don’t get adequate supply at the appropriate time and price, causing huge losses to companies and turning good assets into stressed ones. Fundamental actions needed are – a) fix up coal prices on a “cost-plus basis plan”, b) make coal available throughout the year on a pay-and-take basis as per the requirement, and c) augment coal production by allowing the private sector to create employment. Government has recently allowed 100% FDI in mining and sale of coal, opening up the sector to private companies, both Indian and foreign. Entry of private sector mining specialists is expected to expose coal mining to state-of-the-art technology, scientific mine management and eco-friendly pollution control techniques. However, with issues of inadequate support infrastructure and problems regarding land availability, it may take a while before 100% FDI production kicks off. Nonetheless, the FDI liberalization in coal opens up many possibilities, namely partial divestment of Coal India Ltd. (CIL), hiving off an entire subsidiary to a foreign investor and accelerated development of an array of clean coal technologies.

Tax cuts: The government, in order to pump-prime the economy, has announced several reduction in tax rates for Indian companies, but with many riders:a) Corporate tax at 22% plus surcharge effective rate of 25.17% if one foregoes exemptions/incentives.b) No Minimum Alternative Tax (MAT).c) 15% effective rate, 17% if set up on or after October 2020 and if production begins by March 31, 2023.d) Tax on buy-back of shares scrapped.e) No Angel Tax on start-ups.f) Capital gain tax on debt securities exempted from surcharge.

Industrialists and economists doubt the efficacy of these tax cuts in boosting investments.

The reasons are: a) there are so many riders, b) companies will more likely want to use part of the resultant surplus liquidity to create a buffer to meet the crisis arising from the global slowdown and trade wars, and c) liquidity will be used to reduce debts which appear to be massive for all. All are aggressively reducing debts.

Even after these reductions, the corporate tax is still higher than the rate of 21% of USA, 20% of Taiwan, Thailand, Vietnam and Cambodia, 17% of Singapore, 19% of UK, and 25% of China. US President Donald Trump had cut tax rates for the super-rich to fuel consumption and saving for investment or pay out personal debts against pledge of shares.

To boost consumption and investment, government should have reduced personal income taxes and increased the exemption. Part of the surplus saving in the hands of people would have been routed to stock market and for buying real estate.

Government estimates that it has forgone revenue of Rs. 1.45 lakh crore in 2019-20. It may not be so if manufacturing activities receive a boost because of this. Corporates can increase payment of dividend, on which tax revenue will increase. Consumption may get a boost. However, while government stands to lose some revenue, at the same time it is also supposed to make some notional savings by discontinuing the exemptions and incentives. The figure is estimated to be around Rs. 1.08 lakh crore. So, the net revenue loss can be much smaller than what is being projected.Government should have reduced tax on dividend to boost the investment by retail investors in stock market.

MSMEs: Government has advised state-owned banks to ensure that none of the MSMEs’ stressed loan be declared an NPA till March 31, 2020. They should avail RBI dispersion for restructuring stressed assets.

Stock market: Tax cuts as announced by the government, had pushed up the Sensex by 1900 points on the day following the announcement. FPIs have purchased stocks.Next day market had fallen by reading the impact of tax cut and profit booking.

GST: FM has recently cut GST rates for some consumer goods. To encourage tourism she has also cut GST rates on hotel room rents.

Several Regulatory Authorities: There are several regulatory authorities. To start a business or do a business, manifold approvals, licenses and permissions are required. By the time one acquires these, the cost of projects overrun. Things go haywire. A business gets burdened with interest and overhead costs, wiping out capital and causing debt burden.

Demographic Dividend: Bharat’s working age population has been growing larger than the dependent population. This bulge in the working age population is going to last till 2055. The ratio of dependence to the working age population is expected to only start rising from 2040. According to the Economic Survey 2018-19, India’s demographic dividend will peak at 2041, when the working age segment of 20-59 years is expected to hit 59%. India has one of the youngest populations in an ageing world. The transition happens largely because of a decrease in the total fertility rate (TFR –which is the number of births per woman). There is a mounting concern that the future for working people would turn out to be jobless due to low investments, deglobalisation, technological progress and global trade wars. Unskilled workers are more than skilled workers. The Prime Minister’s Skill Development Yojana is riddled with various administrative rules and regulations. Reforms are needed to reduce the red tape so that the full potential of the scheme is realised.

Population control measures, surplus resources for better living, more social infrastructure, education and healthcare, better housing, increase in women workforce, increase in savings, double-income families, alongside enabling government policies can help reap the demographic dividend, which has historically contributed up to 15% of the overall growth in advanced countries.

The working population needs jobs. Investment is required. Risk appetite is to be ignited. Decriminalisation of commercial rules and laws and taxes (both direct and indirect) is essential. Licenses, permissions and approvals should be minimized. There should be one common system to get these within a period of six months of launching a project. For any permission missing deadline, it should be given ‘deemed approved’ status.

To conclude, lowering corporate tax will not boost manufacturing activities as capacity utilisation is very low and debts are high and are rising due to compounding of interest. Government should have remove dividend tax and lowered personal taxes so that investors can have more earnings and returns to reinvest and use for consumption to increase the activities of manufacturing and services.

Massive investment is required in agro-based industries, agriculture, cattle rearing, fisheries, rural based industries, and social infrastructure. Stopping or reducing the import of goods, which are already manufactured in India, is essential to the success of ‘Make in India’. International multi-retail chains should not be allowed to harm domestic retailers.


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