Four reasons why Sitharaman's stimulus measures are short on vision

Allowing larger firms to flourish, enabling smaller firms to secure cheap financing and forcing the state to retreat from business would be the great news the private sector has been waiting for.

India is belatedly acknowledging that something’s gone wrong with what was once billed as the world’s fastest-growing economy.

That’s the good news. The bad news is that New Delhi still doesn’t have a cohesive strategy to reverse the slowdown.

Finance Minister Nirmala Sitharaman did offer a stimulus package on Friday. The highlight was the rollback of a tax surcharge on overseas investors that she herself had imposed in July’s budget. It’s a welcome concession, though there’s no logic in giving global banks a break on derivatives they trade in India while denying the same tax benefit to local hedge funds.

This unfair discrimination against a nascent industry in domestic alternative assets is Exhibit A of the nonstrategic thinking that’s clouding policy-making in India. Exhibit B is the so-called angel tax on startups, a much-hated levy that has finally been removed. The tax was introduced by the previous Congress Party-led government and treated money raised by fledgling firms as income. Why did this instrument for harassing private businesses stay on the statute books for seven years, when getting rid of it was so simple?

The finance minister’s plan to deal with a long and painful slide in the auto industry, where July sales slumped 36 per cent, is Exhibit C. The government will buy more cars for its fleet, she said. That, and an assurance that vehicles purchased now won’t become illegal when stricter pollution standards kick in next year, should help deal with some of the inventory buildup. But carmakers are unlikely to ramp up production until they see a sustainable return to normal volumes. That will require dealing with both depressed incomes of consumers and a financing funk.

Enter Exhibit D. Sitharaman will hasten the injection of Rs 700 billion ($9.8 billion) of additional capital into state-run banks, a policy she announced in July. It’s not enough. Lenders still need to absorb the full hit from Rs 2.4 trillion of bad debt accumulated in just 16 companies, which they’re trying to address outside the courts. Half of that reflects loans to troubled shadow banks, according to Credit Suisse Group AG. The figures for haircuts being discussed in the media are so large that banks will have little spare capital to expand their balance sheets.

Business Standard