On August 23, Finance Minster Nirmala Sitharaman rolled out a package for the economy, which was long overdue. But the million dollar question (or should one say the $5-trillion dollar question) is whether this package will unleash the ‘animal spirits’ and put the economy back on the high-growth path?
The major component of the ‘booster dose’, as most newspapers called it, was the package for the auto sector. Post-liberalisation, the auto sector has been seen as a key bellwether of the economy. This sector has been in a slumber for the last few months with sales plummeting and inventory piling up. There have even been dire reports of job losses. Maruti Suzuki, the country’s largest car manufacturer, in its recent AGM said that it will not be renewing the contracts of its contract/temporary workers.
So it is no surprise that the Finance Minister paid a great deal of attention to this sector. The major proposals include — BS-IV vehicles bought before March 31, 2020 will remain operational till the validity of the car’s registration; both EV and liquid fuel driven cars will continue to be registered; lifting of government ban on purchase of vehicles; and easier depreciation norms for vehicles bought till March 31, 2020.
The other major components of the package are the scrapping of higher surcharge on foreign portfolio investors and the ₹70,000-crore capital infusion into public sector banks.
‘Cyclical slowdown’
The annual report of the Reserve Bank of India (RBI) released on Friday too talks about the slowdown in the economy, though it calls it a ‘cyclical’ slowdown and not a ‘structural’ one.
The report does well to talk about the weak demand conditions prevailing in the country. It pertinently mentions rural demand being “sapped by weaker harvests in 2018-19”. The report flags the “worrisome” slowdown in consumption “which accounts for 57 per cent of the GDP”.
To revive “animal spirits” in the economy, the RBI advocates major reforms in the land and labour markets and further movement on the ‘ease of doing business’ front.
So it is quite clear now that the slowdown is both on the investment and consumption fronts — that are, of course, interlinked. The industry is wary of investing in new ventures and expanding capacity and would rather rely on using idle capacity as it sees no great demand for its products in a climate of weak consumption.
A stimulus package?
In this scenario, will the Finance Minister’s package work? Unlikely, say some economists, chief among them being JNU professor Jayati Ghosh. They argue that the package focuses entirely on the “supply” side of the economy, ignoring the “consumption” side. So the need of the hour is not only to revive the “animal spirits” of our entrepreneurs, but more importantly to revive demand or, in other words, make people spend more.
Now we get into a bit of a “chicken and egg” problem here. Will the industry pick up the baton from the Finance Minister and invest more in an economy beset with weak consumption?
The capital infusion has brought relief for the beleaguered public sector banks, though some argue the amount is inadequate. But even if banks, buoyed by healthier balance sheets, are willing to lend again in a big way will industry take the bait?
Ghosh argued for a major booster on the consumption side. The rural distress over the last few years, she asserts, has been a major factor in contributing to the weak consumption pattern prevailing in the economy. Her solution is for a major spend on the MGNREGA scheme, which is expected to boost job creation and lead to greater earnings and higher demand from the rural economy. But that is unlikely, given this government’s rather testy relationship with this mega job scheme (that was, after all, the brainchild of the UPA).
Other than the rural economy, the sector crying out for help is real estate. It has been mired in regulatory issues over the years with a number of big realty companies facing bankruptcies. It must be remembered that the real estate and construction industry was a major job creator in the boom period of 2005-10.
There are enough studies and reports that point to how people from rural India — landless labourers as well as small-land holders — migrate during the lean season to cities and it is to the construction industry that most them gravitate in search of jobs.
So will the Finance Minister’s second ‘booster dose’ focus on the rural and construction sectors to kick-start the consumption cycle?