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Economic slowdown: No big-bang fiscal stimulus likely

Already, NITI Aayog has proposed a comprehensive scrappage policy, as part of which buyers of new vehicles will get incentives in lieu of scrapping their old vehicles.

Top government officials on Thursday sought to temper expectations of a big-bang stimulus package to revive sagging economic growth, aiding a slide in the stock markets. Speaking at the Hero MindMine Summit 2019, chief economic advisor Krishnamurthy Subramanian said government intervention to bail out the private sector every time it goes through a “sunset phase” creates a “moral hazard” and is an “anathema” for the market economy. At the same event, power secretary Subhash Chandra Garg — who was the finance secretary until late July — held that reduction in interest rates and easier availability of credit to the private sector are better tools to boost growth than a fiscal stimulus.

Garg said economic growth in the first quarter could be around 5.5-6% (against a five-year low of 5.8% in the March quarter) mainly due to subdued government expenditure on account of elections, and some demand compression.  After a slowdown in the budgeted expenditure in Q1FY20, the Centre may, however, step up spending in Q2 to reach the spending trend of 53-54% by September (H1).

Separately, in a reply on Twitter, Subramanian asserted that the government was “identifying the structural constraints faced by industry and working to remove them”. This will “empower industry to invest and foster the virtuous cycle” of growth led by investments.

The statements underscore the government’s discomfiture to loosen its purse strings in a big way, given the ‘limited fiscal space’ amid subdued tax collection growth. Nevertheless, it will likely opt for targeted interventions in critical sectors like auto, MSMEs and infrastructure. Also, it could front-load its spending to spur demand.

Already, NITI Aayog has proposed a comprehensive scrappage policy, as part of which buyers of new vehicles will get incentives in lieu of scrapping their old vehicles. While an incentive of Rs 50,000 is proposed for 10-year old commercial vehicles, buyers of passenger vehicles will get Rs 20,000. Buyers of new two and three wheelers will get a relief of Rs 5,000, a source told FE.

Niti Aayog is also learnt to have suggested that the interest rates on elevated small savings deposits, a sore point with many banks, be cut over the next two years from 8% to 5%, the taxes on dividend distribution and buybacks be rolled back and the government clear its arbitration award dues expeditiously. According to a CNBC-TV18 report, the government has already paid 75% arbitration awards in contractual disputes in 2016.

While the central bank and India Inc have called for a greater transmission of the RBI’s repo rate cuts (110 basis points since February), many banks have shied away from doing so, as the elevated interest rates on small savings, fixed by the government, have forced them to pay more on their deposit rates.

Speaking at the event, Subramanian said: “I think we expect the government to use tax-payers’ money to intervene every time there is a sunset phase.” “You introduce possible moral hazard from too-big-to-fail and possibility of a situation where profits are private and losses are socialized, which is basically an anathema to the way the market economy functions.”

Earlier, the CEA had said the government support is required at the time of infancy, and not when one has grown up. “I would say that the private sector has been in India since 1991 (liberalisation) and is now a 30-year-old kid. A 30-year-old kid, a man, now needs to start saying that I can stand on my own feet. I don’t need to go to papa.”

The finance ministry is weighing proposals to “ring-fence” foreign portfolio investors (FPIs) structured as trusts from the higher surcharge and review the dividend distribution tax (DDT) and the long-term capital gains (LTCG) tax.

While a cut in the corporate tax rate and personal income tax reliefs have been recommended by the direct tax code panel, analysts say the government will have to forgo Rs 1.2 lakh crore if all the panel’s suggestions for tax reductions are accepted. However, this can be done if the government withdraws various exemptions extended to both companies and individuals.

To boost exports, while the government is considering “full reimbursement” of various imposts on outbound shipment, the Reserve Bank of India has proposed to ease priority-sector lending norms for exporters. Currently, exporters with a turnover of up to Rs 100 crore each are eligible for credit under the priority-sector norms. This limit is likely to be scrapped or doubled so that more exporters are benefitted.

Even though tepid growth in tax revenue is constraining the fiscal situation, some experts believe that the fiscal space for a much-needed stimulus could indeed be found. Over 5% of GDP is lost due to tax exemptions, they point out, adding that some 1.5% of GDP as spending accounted for is not actually spent.

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Source: Financial Express