As the NDA government took charge for its second term in May last year, the intensification of the economic slowdown had already begun to show up across sectors. Gross Domestic Product (GDP) growth slowed to 5.2 per cent in the April-June quarter as consumption and investment demand weakened, leading to a clamour for the government to loosen its purse strings, given that government expenditure was almost solely supporting the country’s growth after consumption was impacted by the unfolding crisis in the non-banking financial sector later into the year. The downward spiral has been accentuated by the lockdown that was enforced since late March to tackle the spread of Covid-19 pandemic, with most economists projecting that the Indian economy will record a contraction in GDP this year, while any recovery is expected to be long drawn process.
While investment and exports were already lacklustre, consumption was impacted by the crisis in the non-banking financial sector triggered by the default on repayment of commercial papers by Infrastructure Leasing & Financial Services Ltd (IL&FS) in August 2018, which choked credit in the financial system and caused risk averseness. The failure of Yes Bank to raise capital at adequate time, and subsequent freeze on deposit withdrawals imposed by the Reserve Bank of India to stitch together a resurrection plan, further exposed the fragilities in the financial system.
Added to this, the support to the economy from government expenditure took a further hit as revenue collections started to slow down. The government’s decision to undertake a corporate tax cut for domestic companies to 22 per cent and for new domestic manufacturing companies to 15 per cent in the middle of the year in September, along with few other tax related relief measures, added to the burden to the exchequer, estimated to the tune of about Rs 1.45 lakh crore. In terms of fresh investments, though, there was little to show for it. The space for aggressive government spending shrunk further as the government tried to stick to the fiscal deficit target and eventually took recourse of the 0.5 per cent escape clause to finally end the 2019-20 financial year with a fiscal gap estimate of 3.8 per cent of the GDP instead of 3.3 per cent earlier.
A slew of announcements were made by the government after the Budget in July 2019, aimed at quelling anxiety around slowing economic growth and weak consumption and investment demand, but concerns remained about the recovery in aggregate demand. The government went back on its Budget announcements of external currency-denominated overseas sovereign bond issuance and the surcharge on capital gains on shares for both foreign and domestic investors. The growth story, however, remained grim with the GDP growth continuing to slide further to 4.4 per cent in July-September and 4.1 per cent in October-December.
The tweaks in taxation structure were also extended on the direct taxes side in this year’s budget presented in February, wherein the government introduced new tax slabs with reduced rates for an annual income of up to Rs 15 lakh for those foregoing exemptions and deductions under a simplified tax regime. The new income tax system is optional and a taxpayer can choose to remain in the existing regime with exemptions and deductions.
Top sources in the Finance Ministry said on Friday that the approach adopted by the government, after the Covid-19 pandemic and during much of the last year, has been aimed at “kickstarting the economy” through the corporate tax and GST rate cuts to boost investment and consumption. The measures announced as part of the Atmanirbhar package intend to provide credit support to companies as well as individuals, they said. The thinking in the government is that it’s better for “economic agents” to borrow at lenient terms and kickstart activity as the lockdown eases, instead of the government expanding the fiscal deficit by a wide margin, they said.
The push towards aggressive lending notwithstanding, the RBI data reflected a near collapse of the industry demand for bank credit since 2016. While the bank credit outstanding to the industry grew just marginally by 0.7 per cent to Rs 29.05 lakh crore in the year ended March 2020, over the last four years, credit outstanding to the industry has expanded by just Rs 1,74,451 crore, or at a compounded annual growth rate of 1.56 per cent. Sources in the finance ministry said banks already have “loan sanctions in place for nearly Rs 7 lakh crore worth of loans” and disbursement will now pick up with economic activity restarting.
Various agencies have projected that India will experience the worst recession in current year, despite measures taken by the government. Rating agency CRISIL in a recent report said India’s growth will fall off the cliff and contract 5 per cent in fiscal 2021, and going back to pre-pandemic growth rates in the next 3 years doesn’t seem likely. In the past 69 years, India has seen a recession only thrice — as per available data — in fiscals 1958, 1966 and 1980. Finance ministry officials have refrained from giving any assessment on the GDP so far, arguing that the uncertainty make it difficult to predict what will be growth for the year and the government is rather focussed on dealing with the crisis.
“First thing to keep in mind is that there is significant uncertainty about growth…and especially about predicting amid the Covid pandemic because unlike an economic phenomenon where one can say that with some degree of certainty that phenomenon may end at this point in time, (but) this is primarily a pandemic and so all responses, like the lockdown is affecting economy. So uncertainty is really about when will we have a vaccine and whether this can be administered to a large number of people across countries. Given all this, it’s very hard for anybody to make a reliable estimate,” Chief Economic Adviser Krishnamurthy Subramanian told The Indian Express in a recent interview.
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