Centre must loosen purse strings (Indian Express)

Mains Paper 2: Governance
Prelims level: Not much
Mains level: Outlook of the government policies

Context

• The first set of announcements came against the backdrop of mis-governance of the earlier regime. This time around, it is an acknowledgment that something is amiss in
• The economy with GDP growth for the first quarter of 2019-20 slipping to a six-year low of 5 per cent.
• While economists are debating whether the current slowdown is cyclical or structural, the fact is that jobs are not being created.
• Consumption is not picking up and companies are not investing like they used to.

Background

• This has been the trend since demonetisation in 2016.
• Growth, across sectors, barring electricity and the government, has been less than 8 per cent, and less than last year.
• Manufacturing, in particular, has grown by just 0.6 per cent in the first quarter, and while the high base effect of 12.1 per cent last year provides some comfort.
• The fact is that there is evidence of a washout in the auto segment with large job losses reported and with India Inc’s sales at around 4-5 per cent in the first quarter.
• In 2017, low growth was attributed to GST, which led to destocking and hence, lower production. This time, it is structural in nature, with the demand side dominating.
• The trade and transport as well as finance and real estate sectors have also witnessed lower growth in the first quarter at 7.1 per cent and 5.9 per cent respectively.
• Growth in construction has also slowed down from 9.6 per cent in the first quarter last year to 5.7 per cent this year with limited activity seen only in segments such as roads, where the central government is involved.
• The private sector is still cautious in investing, as evident in the slight dip in the gross fixed capital formation ratio from 30 per cent of GDP in Q1 2018-19 to 29.7 per cent in Q1 2019-20.

Reasons behind the slowdown

• The reason for the slowdown is more on the demand side.
• Households are not spending as employment generation has been limited and incomes have not been rising.
• The rural economy has been buffeted in the last three years by demonetisation and lower price realisation due to good harvests.
• It remains to be seen whether prices will firm up at the time of the kharif harvest.
• The auto and consumer durable segments have been affected the most on this score as the propensity to spend tends to be higher in rural areas, especially during the harvest season which coincides with the festival season.
• The sectors that have been doing relatively better are cement and steel, where expenditure is government linked, and segments such as housing, e-commerce and retail.
• However, the real estate segment has been under pressure with the NBFC route of financing being severed.

How is one to read all these steps?

• The first package was more in terms of fostering operational convenience reversal of the surcharge on FPIs and revisiting the clause relating to angel investors.
• SME payments are to be streamlined with a one-time settlement plan in place and the government is to ensure that it makes its payments on time for projects (over Rs 40,000 crore is stuck in the pipeline).
• Banks have been given Rs 70,000 crore through recapitalisation (this was already in the budget through recap bonds which was anyway fiscal neutral), and structures have been created for the corporate bond market.
• While the auto sector is to get some relief on depreciation on vehicles and the government has clarified on the validity of registration on Bharat IV vehicles, the government will now be buying new vehicles, which was barred earlier.
• But, the question is whether the government has more money to spend given its tight budget. The stocks of auto companies have not been enthused.
• The FDI rules now give single brand more breathing space in terms of local procurement and setting up of physical structures.
• Also, 100 per cent FDI through the automatic route in coal mining and related activities has been permitted as has 26 per cent FDI under the government route for uploading/ streaming of news and current affairs in digital media.
• However, these rules take time to work out and one does not expect to see a flurry of capital flows.
• The big bank-merger plan announced on August 30 is progressive. But, it may not really add much on the credit side as the amount of capital to be provided remains unchanged and only the bank names would change.
• While governance standards will change, there will still be a reluctance to lend to risky projects.

Conclusion

• Therefore, while there will be fewer public sector banks, the mindset will not change.
• Besides, in the present environment, liquidity is less of an issue compared to the willingness to lend, given the credit risk profile of India Inc.
• This is critical, as the problem is deep on the demand side. Making “doing business” easier is a positive, and creating mega PSBs a progressive step.
• But this cannot change the 5 per cent growth number immediately. Money has to be spent and a fiscal compromise is required.
• Or else, we will continue to walk the path of gradual upward movement.

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  General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) Consider the following statements regarding Fixed Dose Combination Drugs (FDCs):
1. FDCs contain two or more active pharmaceutical ingredients, distributed in variable doses and targeting multiple diseases.
2. FDCs are useful for chronic conditions especially, when multiple disorders coexist.

Which of the above statements is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor

Correct Answer: C
Mains Questions:
Q.1) What is definitely missing from the policies announced so far is a direct stimulus in terms of financial outlays from the Centre? Comment.