The new reform agenda of Modi 2.0

Stung by the all-round criticism of the government’s inability to stop the country’s economic downslide, reports of increased harassment of businessmen for their inability to pay taxes, desertion of domestic and foreign portfolio investors from the Indian bourses because of high taxation, and news of growing joblessness in various sectors, the finance ministry finally came out with a strong response. The aim of the finance minister Nirmala Sitharaman’s slew of reforms, announced on Friday, was not just to correct the anomalies of the last Budget (FY 20) but also put the economy back on the growth trajectory and provide much-needed respite  to suffering sectors.

Although, it took a while to get their act together, but the new reform agenda of the government presents a sound combination of fiscal, liquidity, and administrative measures, with a promise to do much more in the near future.  Such announcements, the government hopes, will drive away negative sentiments that has been clouding the Indian economy for sometime now and bring the sheen back to the capital markets. But more importantly, the government wanted to dispel the notion that the BJP-ruled National Democratic government had launched a reign of “tax terrorism” and “fear psychosis” among the people to meet its revenue targets. The din had grown much louder after the suicide of V. G. Siddhartha, founder of the Cafe Coffee Day, with many industrialists coming out against the government’s heavy- handed approach. So an image makeover had become a necessity.

In fact, the finance minister repeatedly stated at the press conference that the government was all for “respecting and honouring the wealth creators,’’ (obviously referring to industrialists) and that steps are being taken to ensure that there is no harassment of industrialists from tax authorities for some issues. “Changes made by the government in recent months have been consistent in their approach—reducing harassment and ensuring that an oversight or minor infringement does not get treated as a crime,’’ she stated This has been evident in the move towards faceless processing and assessment matters relating to income-tax including IT returns, changes in the companies Act, which promote ease of doing business and increased responsibility of companies, she added.

Hence, from October 1, she maintained that all orders, notices, summons, by the income-tax authorities shall be issued through a centralised computer system and will contain a computer-generated unique document identification number. The minister also emphasised that notices “without such an identification number will be considered invalid.” Not only would there be faceless scrutiny of the tax payments but it will also be randomised, which means the tax details of a person in Noida, UP may be scrutinised by someone in Assam.

Moreover, she also did away with another pain point of the corporate sector by announcing that any violation of the corporate social responsibility will be treated as a civil offence rather than a criminal one as had been proposed in the last Budget. She also pointed out that 16 offences, which were earlier considered persecution-based penalty, would now be treated as monetary-based penalty. She also maintained that she had asked the tax officials not to overreach themselves in an attempt to meet the revenue targets, which she believes are realistic enough.

Lack of credit and risk-averse banks have been a major cause of concern not just by the beleaguered sectors like non-banking financial companies and housing finance companies (HFC) but also for many middle, small and micro companies, not to forget traders. To ensure a credit push for these sectors, the FM announced an instant infusion of ₹70,000 crore for recapitalisation of public sector banks through bonds, which will give banks an opportunity to lend ₹5 lakh crore to its borrowers. And for HCFs, suffering from a credit squeeze for nearly a year after the meltdown of the Infrastructure Leasing and Financing company, the government-owned National Housing Bank will provide ₹30,000 crore to ease their liquidity woes.

For NBFCs hit hard by the IL&FS scandal, there is some respite in sight too. Public sector banks will open their coffers to NBFCs and jointly lend to individuals and companies through the co-origination route as proposed by the RBI, because of the greater reach of the later. Moreover, banks can also acquire the retail portfolio of these NBFCs, thereby providing them temporary relief.

To bring down the high cost of credit from banks, despite the Reserve Bank of India reducing the interest on repo rate or policy rate, Sitharaman announced that the finance ministry has arrived at an understanding with banks to reduce their lending rates as soon as they get the signal from the central bank. One of reasons that had prevented bankers from lending and ensured a “”safety first” approach had been the fear of persecution in case these loans turn bad or non-performing assets. Bankers feared that they would be hounded by the Central Bureau of Investigation, Central Vigilance Commissioner even after their retirement. To allay their fears the government announced a new mechanism under which lenders will set up an internal advisory committee to decide on loan demands. Then there are measures to protect the honest bankers, improved one-time loan settlement policy for MSMEs and retail borrowers and even online tracking of loan applications.

“The slew of announcements made by the finance minister will act as major enablers for continuing to support growth. Bank recapitalisation at one go will provide a big impetus to credit growth. Also, honest decision-making will not be questioned, a major mojo for a cleaner and better economy,” says Rajnish Kumar, chairman, State Bank of India.

The automobile sector’s growing pains—the most vocal of all sectors— too have been temporarily resolved. The government’s decision to buy new vehicles, which had been on hold for sometimes now, will send a positive signal to buyers. A “Scrapping Policy” for old vehicles, that is still-on-the cards, suspension of proposed increase in registration fees of vehicles, clarity on emission standards ( allowing BS IV vehicles to continue even after April 1, 2020 deadline) and a higher depreciation of 30% too will help revive sentiments, though the challenges of over production will continue for sometime now.

“These measures,” says Venu Srinivasan, chairman TVS Motor Company, “will provide the immediate relief that the industry was seeking. The promptness of this government’s response is reassuring for not just industry, but for the common man as well because it’s putting liquidity into the market and easing the squeeze on the small and medium sector.” Policy stability and proactiveness are something that all industrialists crave for.

And for those domestic and foreign portfolio investors worried about the directions of the capital markets after the measures announced in the last Budget, there were some reassuring moves. Sitharaman announced the reversal of some of the measures introduced in the budget like the enhanced surcharge levied on long and short-term capital gains from the transfer of equity shares and units and that the pre-Budget position will be retained. Tax rates for foreign portfolio investors (FPIs) have now come down from 7% to 4%. Other measures include simplifying the know-your customer rules for the FPIs etc. After all, the stock market had been bleeding since July with FPIs pulling out nearly $3.4 billion from India, and somebody needed to staunch it.

MSMEs, which have always formed an important vote bank of the ruling BJP, have also been given a stronger booster dose to help them tide over the present crisis.  MSME exporters, who have been shouting from the rooftops, for not getting their refunds and arrears under general goods and services (GST) regime have been promised that all their arrears will now be repaid within 30 days, and those caught up in litigation will have to pay only 75% of the repatriation fee. The FM also announced that the expenditure department had already cleared pending bills worth ₹30,000 crore and that the ministry will closely monitor all refunds along with the cabinet secretariat, along with a promise to provide a new definition of MSMEs.

Lastly on the infrastructure front, the FM announced the setting up of an inter-ministerial task force to finalise the pipeline of infrastructure projects as the government rolls out a ₹100 crore plan to upgrade the network over the next five years. And to provide long-term funds, the government plans to set up an organisation to provide credit enhancement for infrastructure and housing projects.

While all these measures will surely boost sentiments, give a fillip to the stock markets, provide some balm for sectors reeling from paucity of funds and other challenges, but it is unlikely to provide a medium-term solution for an economy suffering from a structural slowdown, as predicted by many economists. Farm incomes are not keeping pace with the rise in input agricultural costs resulting in a serious consumption slowdown in rural areas and leading to rural distress. The near-demise of construction sector has also meant that not much migration is happening from the rural to the urban sector to boost farmers’ income.

Studies have shown that depressed incomes are forcing people to dip into their household savings to meet their current needs, which means less money for the government and the private sector for greater investments. Household savings have fallen from 23% to 17% in the past six years and capacity utilisation of most industries continue to hover around 75%. Again, joblessness, under employment and stagnant wages and salaries continue to hurt the economy as are the newer challenges emanating from a  slowing global economy. India’s trade has stagnated at 1.7% of global trade for the past 10 years and is unlikely to grow in the current situation of trade wars, currency devaluations and protectionist policies. In time, the government will have to take many more structural reforms like land, labour quality and also encourage firms to grow because larger firms are more efficient and productive than the smaller ones. A beginning has been made, the journey remains.