Opinion It’s the slowdown

The government’s tax revenues in the first quarter of the current financial year provide a clear indication of how deep the slowdown is.

On Tuesday, Parliament passed amendments to the Companies Act to tighten the norms pertaining to corporate social responsibility (CSR). Failure to comply with these new norms — for an activity that should ideally be voluntary — will not only attract fines but could also lead to imprisonment. Provisions such as these, which pave the way for the exercise of greater bureaucratic discretion, are unlikely to go down well with India Inc. More disquietingly, rather than revive animal spirits, these moves, which go against this government’s stated belief in minimum government, will only further dampen sentiment, and distract even more from the pressing need to address the slowdown in economic activity.

Multiple indicators suggest that, despite various initiatives of the government, the Indian economy is the midst of a structural slowdown. With income growth slowing down, households have been dipping into savings and borrowing to finance their consumption. This is unsustainable. As it is, demand in both rural and urban areas is falling, as most high frequency indicators such as car and two-wheeler sales suggest. In such a situation, the temptation to squeeze the rich for short-term revenue considerations should have been avoided. Exports continue to remain subdued and are unlikely to perk up as global growth and trade are expected to moderate. The corporate sector, which is in the midst of deleveraging, is unlikely to ramp up investments quickly. The earnings season so far has been lacklustre. The issues in the NBFC segment are yet to be contained. The government’s tax revenues in the first quarter of the current financial year provide a clear indication of how deep the slowdown is. Growth forecasts for the current financial year are already being pared down.

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At this juncture, a business as usual approach will not suffice. With tax revenues growing at less than nominal GDP, the space for counter cyclical policy seems to be exhausted. Instead, the government may end up cutting its expenditure. Monetary policy has little capacity to reverse this decline in growth in the short term. With the limits of state-led growth being realised, it underscores the need to carry out deeper structural reforms. The hard-won political capital is better spent on pushing through contentious but necessary factor market reforms rather than expending it on misguided policies such as tightening CSR norms. An ambitious reform agenda is needed to create conditions conducive for a revival of private demand, investments and exports. Failure to course correct will undoubtedly dampen the hopes of achieving the $5 trillion target.