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Addressing Economic Slowdown

Overall government continues to show fiscal prudence while staying committed to accelerating growth in economy.

The Finance Minister on August 23, 2019, announced a spate of sector specific initiatives in an attempt to address a growth slowdown. Most of the measures that were announced were largely pertaining to regulatory easing and releasing capital to meet the liquidity requirement and augment growth. The market sentiment had taken a beating post the announcement of a surcharge on capital gains for both domestic as well as Foreign Portfolio Investors (FPIs) in July 2019. 

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Consequently, the market saw huge redemption as investors rushed to withdraw their investments in a response to a perceived “unfriendly” regulatory environment. However, the government has been cognisant of dwindling market sentiment and in order to alleviate this pain, the Finance Minister (FM) rolled back the surcharge on capital gains. The other significant announcements that were made: 

  • Front-loading of capital injection for Public Sector Banks (PSBs) to the tune of Rs 700 billion

  • Improving the liquidity condition for micro, small and medium enterprises (MSMEs) by committing to pay all pending GST refunds to MSMEs within 30 days, and ensuring all future refunds are cleared within 60 days

  • Additional liquidity support to Housing Finance Companies of Rs 200 billion by the National Housing Board, thereby increasing total liquidity support to RS 300 billion and

  • Regulatory easing for the auto sector mentioned below which is incrementally positive

    • BS IV vehicles purchased until Mar-20 to remain operational for the entire period of registration, thus removing regulatory uncertainty

    • Proposal to hike vehicle registration fee deferred to June 2020.

    • Depreciation on vehicles increased to 30% from 15%.

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The government has taken a few creative measures to kick-start consumption for the auto sector. Instead of the much expected reduction in GST for the auto sector, the government has nudged government departments to replace the ageing fleet. This can play an integral role in giving a fillip to the demand cycle. The higher depreciation allowance is also expected to increase consumption. The focus of the government has been to augment demand through indirect efforts like better monetary transmission and new loans to be linked to repo rate and external benchmark, which would lead to better and faster transmission of repo rate movement. 

The FM did not provide any direct stimulus and no additional government spending thereby, being mindful of the fiscal situation and target. Post the 35bps rate cut, bond yields had hardened by 25bps in the last fortnight on the back of expectations of a fiscal stimulus from government to fuel the economic growth.  The government said that two more packages will be announced over the coming weeks. The real estate sector also would require some governmental measures which can help the flagging sector in its revival. Better transmission of rates may not alone help the sector’s revival.

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Overall the government continues to show fiscal prudence while staying committed to accelerating consumption and growth in the economy.

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