The Centre’s ‘stimulus’ addresses some pain points of industry, markets (The Hindu)

Mains Paper 3: Economy
Prelims level: NBFC crisis
Mains level: Challenges faced by foreign portfolio investor

Context

• Finally reacting to the ‘gloom-and-doom’ narrative around the economy, the Finance Minister announced a slew of steps to kickstart growth, and restore sentiments of the business community, in particular.
• On Friday, the Centre rolled back the additional surcharge on income tax for both foreign and domestic institutional investors announced in the July 5 Budget.
• But the damage has been done: the markets (Sensex and Nifty) are down 10 per cent from the highs of June, with small and mid-cap scrips diving much more.

Challenges faced by foreign portfolio investor

• Foreign portfolio investors have pulled out $3 billion since the Budget.
• The erosion of wealth, given the enhanced levels of retail participation in recent years through mutual funds, is likely to have dampened consumer sentiment.
• For businesses already grappling with an adverse export environment, a credit squeeze on account of the NBFC crisis, some inappropriate GST rates and an intrusive tax administration, the crash in the markets was particularly ill-timed.
• Meanwhile, the macro data are particularly unflattering: following a 6.8 per cent growth rate in 2018-19, Moody’s estimates India’s growth in 2019-20 at 6.2 per cent, while Nomura expects just 5.7 per cent growth in Q1.
• The Centre could not have overlooked this mess, showing up at the popular level in the form of high-profile job losses in the auto and FMCG sectors, for much longer.
• Hence, it has announced that public sector banks will get ₹70,000-crore capitalisation, with a promise to reduce the cost of credit for consumer goods and working capital.
• To ease the conduct of business, the Angel Tax provision for start-ups will be withdrawn and GST formalities simplified. CSR violations will not be treated as a criminal offence, though the obligation remains as a back door tax on corporate profits.

Steps taken by the Government

• The Centre seems intent on a course correction and this is to be welcomed.
• However, it remains to be seen whether this somewhat hectic infusion of funds into banks, and through them hopefully to some NBFCs and MSMEs, will necessarily lead to a pick-up in credit growth.
• Consumer spending needs to pick up for businesses to feel persuaded to borrow and invest and that cannot realistically be expected if jobs are lost more than they are generated.
• The Centre must create jobs and invest in high-multiplier sectors such as railways, besides social infrastructure. A more congenial business environment alone won’t do the trick.

Conclusion

• However, the Centre must demonstrate beyond the steps it has announced to set aside some 1,400 tax ‘offences’ and moving to faceless tax scrutiny that it has set aside its attitude of tax overreach.
• The tax administration has to be more transparent in its functioning. Promises of leniency are not enough.

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Prelims Questions:

Q.1) With reference to ‘Angel Tax’, which of the following statements is/are NOT correct?
1. It is a tax on the excess capital raised by an unlisted company through the issue of shares over and above the fair market value of those shares.
2. The tax was introduced in the 2012 Union Budget by the finance minister to arrest laundering of funds.
3. The tax most commonly affects start-ups and the angel investors who back them.

Select the correct answer using the code given below:
a) 1 only
b) 2 only
c) 1 and 2 only
d) All the above.

Correct Answer: D
Mains Questions:
Q.1) The Finance Minister has finally announced a slew of steps to kickstart growth, but the damage has been done. Critically comment.