There are two kinds of doctors. There are the ones who try and fix the ailment and there are the ones who fix the sentiment. The ones who fix the sentiment may be pleasant in the short term but the long-term impact of their short-term approach only spells disaster for the patient.
Finance Minister Nirmala Sitharaman’s Friday potions may help in a little bump when the markets open on Monday morning but it is only a matter of time before it would be clear to everyone that the government is not only misdiagnosing the problem, it is administering the wrong medicine. It would lead to short term gains but will not take away the long-term pain. But then, she does not have too many cards to play with.
Ms Sitharaman’s policy announcements can be divided into three groups, undoing the not so bright ideas that she thought would help her raise more money in the budget, expressing hope that loans would get cheaper and the third was genuinely trying to fix some measures that were taken by the BJP governments. The problem, however, is that all of them are aimed at fixing the sentiment and not the ailment.
The headline for most business papers would be the roll back of the FPI surcharge which has caused a sharp decline in the money markets. The government expecting to make only Rs 1,400 crore from the surcharge and it would be important to ask the Hon’ble Finance Minister on why she did not anticipate the pain it would cause? One wonders if this was not the FM’s mini-demo moment?
This brings us to a much bigger question about the nature of the markets in the country. The FPIs have pulled out Rs 25,000 crore from the markets since the budget but the markets have lost Rs 14 lakh crore in value. Are the fundamentals of the economy so week that a little overreach is able to destroy such massive amounts of investor wealth?
Making loans cheaper in the hope that it would rekindle demand is another focus area for the Finance Minister but it only exposes the kind of stress the banking system has been under and if they have not passed on the rate cuts to the consumers, they either don’t care or have very good reason for not doing it. And the reason is pretty clear- it is a difficult time for banks as well.
“Before the last reduction earlier this month of 35 basis points, the bank on an average had passed only 29 basis point out of 75 basis points cut affected during 2019,” The Times of India had reported. The government has essentially cut down the lag time and have forced banks to comply but are we really in a position where less than a half a per cent cut in interest rates would revive the animal spirits in the economy.
For almost five and half years now the government has believed that lower interest rates would boost spending but sadly, it is not happened. Banks passing on rate cuts would make great headlines but it remains to be seen how it would impact the bottom lines of the banks?
Making non-compliance of CSR spending a criminal offense was perhaps intended to ensure greater social spending but anyone who understands the voluntary sector will tell you that Corporates have hardly been spending anything in the social sector. It could have perhaps opened up some more funding options for government sponsored social schemes and hence this would be more cosmetic than anything else. If you find this cryptic, let it be because this it a long story which needs to be told separately.
The series of measures announced for the auto sector can be considered pragmatic because the government is only clearing the mess it has created. The government has done everything it could to bring the auto sector out of the mess it is in except cut down on taxes, what the industry wanted. This is a government that is struggling to stay afloat on the tax collection front and hence cutting taxes was out of the question. It would ease some pain but it two things need to be considered here. One, most companies had already made the investments to upgrade to the new emission standards and second, it does solve the fundamental problem- it is a consumption slow down.
The magnitude of the slowdown is best expressed by Britannia and Parle who sell low value products priced between Rs 5 and above. When the biscuit industry tells you that people are thinking twice before buying a pack, you have to understand that the problem is much deeper. Incomes have not kept pace with expenses and people have been forced to think about every Rupee that they spend.
Why did this happen? While demonetization and GST are the obvious villains, the issue is much deeper. It begins with the government’s flawed understanding of how the Indian economy works. The BJP believes that trickle down economics will drive India to high growth. The problem started from the neglect of rural India in the initial years of the BJP government, which killed rural demand and urban India is now seeing the impact of those policies.
We are now a country where unsold inventory in automobiles and real estate have become a serious problem. There are 5 lakh unsold cars, 30 lakh unsold two-wheelers and 13 lakh unsold houses. No matter what the government does, this inventory would take time to clear. The government can make loans cheaper which would help solving some of the problems but that would mean loans going bad within a very short period of time as people don’t have the incomes to pay back.
The biggest problem is with the real estate sector. While the massive unsold inventory of formal housing would take up to 5 years to clear, the bigger problem is the fact that existing housing (real estate that people live in) has lost value and is 30-40% of their peak value, which has completely shaken up middle class families. Ask anyone in the real estate sector and they would tell you that they don’t expect the markets to return to their full value in the near future.
Ms Sitharaman has a problem on her hands which is not of her making. She inherited the mess from her predecessors who thought that Congress’ economic policies were not exciting enough. Someone please tell them that there is a reason why bankers are expected to be risk-averse boring people. Trapeze artists are good in circuses, they are not supposed to drive your car.
Ms Sitharaman should probably go and have a cup of tea with Dr Manmohan Singh, the Good Doctor. We are sure the gracious Dr Singh would surely oblige her with some good advice. We still have to live for almost 55 months before we go into the next elections.