Issues related to Economic growth

[op-ed snap] Nirmala Sitharaman’s stimulus plan falls short on vision

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Stimulus package for the Indian economy - analysis

NEWS

Indian economy is slowing down. In this context, the Finance Minister offered a stimulus package. 

What does it offer?

  1. It rolled back the tax surcharge on overseas investors imposed in the budget.
  2. The angel tax on startups has been removed. 
  3. The government will buy more cars for its fleet.
  4. Injection of 700 billion rupees of additional capital into state-run banks.

Analysis

  1. It gives global banks a break on derivatives they trade in India while denying the same tax benefit to local hedge funds. This can be called unfair discrimination against a nascent industry in domestic alternative assets in India. 
  2. Govt buying cars may arrest the slide in the industry, where July sales slumped 36%. Vehicles purchased now won’t become illegal when stricter pollution standards kick in next year. This can help deal with inventory buildup. 
  3. The capital infusion is beneficial because
    • banks are yet to absorb the 2.4 trillion rupees of bad debt accumulated in just 16 companies
    • Half of that reflects loans to troubled shadow banks, according to Credit Suisse Group AG
    • Even the figures for haircuts are so large

4 A parallel move by RBI to link loan rates to its policy benchmark is laudable.

Way ahead

  1. Carmakers are unlikely to ramp up production until they see a sustainable return to normal volumes. That will require addressing demand and supply-side constraints.
  2. Exports hold enormous potential. With the US-China trade war, India can benefit from integrating into global supply chains, because of the size of its low-paid workforce. 
  3. The three industries that hold the biggest promise for jobs and suppressed wages are textiles, autos, and electronics. They together can support a fourth domestic supply chain – construction and real estate.
    • Bangladesh is ahead in textiles
    • Thailand is stealing a march in autos
    • Vietnam in shining in electronics
    • India needs to show strategic thinking around exports.

CONCLUSION

Allowing larger firms to flourish, enabling smaller firms to secure cheap financing and forcing the state to retreat from the business will benefit the private sector in the long run.

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