New Delhi still doesn’t have a cohesive strategy to reverse the slowdown.
Updated: Aug 26, 2019, 11.41 AM IST
India is belatedly acknowledging that something’s gone wrong with what was once billed as the world’s fastest-growing economy. That’s the good news. The bad news is that New Delhi still doesn’t have a cohesive strategy to reverse the slowdown.
did offer a
on Friday. The highlight was the rollback of a tax surcharge on overseas investors that she herself had imposed in July’s budget. It’s a welcome concession, though there’s no logic in giving global banks a break on derivatives they trade in India while denying the same tax benefit to local hedge funds.
This unfair discrimination against a nascent industry in domestic alternative assets is Exhibit A of the nonstrategic thinking that’s clouding policy-making in India. Exhibit B is the so-called angel tax on startups, a much-hated levy that has finally been removed. The tax was introduced by the previous Congress Party-led government and treated money raised by fledgling firms as income. Why did this instrument for harassing private businesses stay on the statute books for seven years, when getting rid of it was so simple?
The finance minister’s plan to deal with a long and painful slide in the auto industry, where July sales slumped 36%, is Exhibit C. The government will buy more cars for its fleet, she said. That, and an assurance that vehicles purchased now won’t become illegal when stricter pollution standards kick in next year, should help deal with some of the inventory buildup. But carmakers are unlikely to ramp up production until they see a sustainable return to normal volumes. That will require dealing with both depressed incomes of consumers and a financing funk.
Enter Exhibit D. Sitharaman will hasten the injection of 700 billion rupees ($9.8 billion) of additional capital into state-run banks, a policy she announced in July. It’s not enough. Lenders still need to absorb the full hit from 2.4 trillion rupees of bad debt accumulated in just 16 companies, which they’re trying to address outside the courts. Half of that reflects loans to troubled shadow banks, according to
Group AG. The figures for haircuts being discussed in the media are so large that banks will have little spare capital to expand their balance sheets.
What the FM delivered on Friday
A parallel effort by the Reserve Bank of India to link loan rates to its policy benchmark is a laudable move. Here, though, lenders are bound to look for ways to avoid passing on lower borrowing costs to existing customers. The government isn’t willing to face up to the strategic reality that most of its inefficient state-run banks have no strengths beyond their large branch networks, which don’t count for much in a digital world.
When you’re always fighting fires, it’s difficult to turn off the water hose and start tending the garden. The desolate patch that promises the most potential is exports. With U.S. President
The three industries that hold the biggest promise for jobs and suppressed wages are textiles, autos and electronics. The trio can, in turn, support a fourth domestic supply chain – construction and real estate. But Bangladesh is ahead in textiles, Thailand is stealing a march in autos, and Vietnam in shining in electronics. If Sitharaman and her team can show some strategic thinking around exports, India will be on a roll when global demand eventually steadies and recovers.
Allowing larger firms to flourish, enabling smaller firms to secure cheap financing and forcing the state to retreat from business would be the great news the private sector has been waiting for. The wait is becoming interminable.
What top brokerages say on FM’s stimulus package
Winds of change
26 Aug, 2019
Finance Minister Nirmala Sitharaman unveiled the much-awaited stimulus package this past weekend. The popular word on Street remained that such a move would cheer investors, but most brokerages believe that any recovery in the domestic economic will be some time away. Take a look:
26 Aug, 2019
> Liquidity enhancing measures should revive demand at margin > Economic recovery however some time away > Decision on LTCG may lead to arrest in FII outflows > Expects INR to see some stability after bearing the brunt of weak growth fundamentals > Expects the Monetary Policy Committee to cut repo rate by an additional 40-50bp this fiscal > Measures are sentimentally positive and are likely to act as a soothing balm to help stabilize the markets
26 Aug, 2019
> In a not so unanticipated move, Fin Min announced measures to revive economy > Important to note that Govt is not turning a blind eye to the slowdown > Preponnement of demand in autos (PVs from fleets, LCVs) can help reduce excess inventory > Faster payment of GST refunds to MSMEs can help address some amount of liquidity concerns > More measures seem to be coming to revive the real estate sector > Not far away from fundamental buying levels if there are no big cuts to earnings from here > Amongst segments of the markets, the small/midcap is at a discount to large cap
26 Aug, 2019
> Booster from FM’s desk has come, more to follow > Comprehensive package to lift growth and sentiment from Govt announced > Will serve well to boost sentiment, which has been impaired of late due to economic slowdown > Govt willingness to take feedback and act promptly may offset the pessimistic market narrative > Timing-wise, it has come just ahead of the beginning of a long festival season > Expectations of more measures over the next two weeks will likely drive a short-term bounce > Sticking to fiscal prudence will ensure that the bond yields may ease from current levels > Corporate Banks, NBFCs, Autos are the key beneficiaries of the measures unveiled
26 Aug, 2019
> Several positive announcements by the government to improve sentiment > Surplus liquidity and repo-linked interest rates may lead to lower interest rates > Lack of fiscal stimulus may disappoint sections of the industry and market > Structural reforms can turn an adverse global situation into an once-in-a-lifetime opportunity > China-US trade issue escalation will hurt global growth and investment mood
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