Post budget presentation of Union Budget for FY21 on 01 February 2020, I had cautioned the investors to avoid becoming victim of their own expectations . From the reactions over the mega Rs20.97trn stimulus package, coming from the various market participants, it appears that perhaps no one has heeded to my suggestions. The market participants in particular, and the public in general, appear disappointed, dismayed and disillusioned by the policy measures announced by the finance minister in five tranches last week.
The set of policy measures has been analyzed threadbare by numerous experts, commentators, and various stakeholders, using zillions of gigabytes of data. Had the newspaper being published regularly, millions of reams of paper would have also been used by now in analysis and criticism of the set of policy measures announced. I shall therefore refrain from further analyzing the series of announcements made by the finance minister.
(The readers may have noticed that I am deliberately avoiding the term of “stimulus” to describe the set of policy measures announced. In my view, “stimulus” would be a misnomer to describe these measures. In fact, it would not be totally wrong to say that the term “stimulus” must be used only in medical context. Using it in economic, financial, social and personal contexts may be subject to frequent misinterpretations. It is an established principle of human psychology that different people may not respond similarly to the same stimulant. For example, in the principles of management it is recognized that some employees respond to monetary stimulus while the others get stimulated by the challenging tasks.)
However, since many readers have asked for my views, I must state as follows:
(a) The policy measures announced by the finance minister are all good and well intended. There are some serious administrative improvements like allowing private participation in mining sector; rationalization of interstate trade of farm produce, marginalization of the role of APMCs, hike in FDI limit in defense production, consolidation of PSUs, etc. There are some significant liquidity support measures for the beleaguered NBFCs and MSMEs. Some compliance deadlines have been pushed back.
Admittedly, none of the measure announced represents any out of box thinking. Most of these were either in the pipeline (APMC marginalization, defense production, PSU consolidation, accelerated payment of dues to MSME, settlement of Discom dues, interest subvention, MNREGA, Fisheries, Bee Keeping and Social Forestry missions, Contract farming); had already been announced by the RBI is past three months; or are merely extension of the steps already by the government or RBI.
I am sure, only a few could find fault with the policy measures announced per se. These measures are growth supportive and desired.
(b) Packaging the growth supportive measures that were going to be announced anyways over next few months, as emergency stimulus package to counter the socio-economic impact of COVID-19 induced lockdown is a avoidable mistake. This unnecessarily inflated the expectations of people and led to serious disappointment, dismay and disillusionment. With this, the process of diminishing confidence in government’s policy making machinery and abilities that started with demonetization shall accelerate further.
(c) The timing of announcing this set of policy measure is questionable. You imagine a young man who has met with a serious accident and is struggling for his life in ICU of a hospital lying on life support system, and his father shows him picture of a suitable girl that he has found for him. The girl shall marry the boy, if (i) he survives; (ii) is fit enough to marry; and (iii) gets his job back. The boy obviously is not interested in the proposal. He is definitely more interested in standing at his own feet first.
Similar is the situation with the entrepreneurs & farmers staring at huge losses and uncertainties, laborers, daily wage workers, middle class workers facing the prospects of job losses and salary cuts, students and professionals entering the job markets this year, etc.
I however do not concur with the popular rhetoric of cash distribution to stimulate demand; removal of tax on Long Term Capital Gains (LTCG) and Securities Transaction Tax (STT) on equities, and reduction in rates of GST, etc. I am not sure if these measures would help significantly enough to lead the economic revival.
The things like LTCG, STT etc are relevant for a tiny proportion of the economically relevant population. Moreover the amounts involved are insignificant in the broader economic context.
In my view, the government should the following five things simultaneously too help the economy revive and get back on the sustainable growth path:
1. Prepare the ground for accelerated growth in future. This will involve laying the foundation stone for top class infrastructure and supportive policy framework for development of industrial base to widen and deepen the participation of India in global supply chain.
2. Make India self reliant in technology, food and energy.
3. Anticipate the new post COVID-19 world and identify the businesses and methods that shall survive and grow in that world. Support those businesses in their transition. Identify the businesses that might be redundant in the new world order. Arrange for peaceful and orderly demise of such businesses and rehabilitation of the businessmen and workers in the new order.
4. Help the citizens to (a) survive this period of crisis by ensuring adequate supply of all essentials (food, shelter, healthcare, education, clothes etc.) at affordable prices; (ii) retain their dignity in life and death; (iii) acquire new skills that may be needed in the new world order; and (iv) maintain peace and harmony.
5. Ensure the stability, liquidity and vibrancy of the financial system to support the growth and sustenance efforts of the people and businesses.
In my view the lower incomes, job uncertainty, and higher effective taxation shall mean that discretionary demand may not normalize for next three years at least. There is no point in wasting scarce resources in stimulating such demand.
The demand for insurance, healthcare, and skill development needs may become non-discretionary. The government must support people in meeting these demands by enhancing the initiatives like Ayushman Bharat, Skill India etc.
Our team visited Agra and Aligarh divisions of UP over past 5 days. I shall share some key observations made during this visit tomorrow.