At a time when the economy is expected to contract sharply, we continue to apply bandages. There was hope after Prime Minister Narendra Modi announced a 20 trillion rupee package, translating to roughly 10 percent of gross domestic product.
Finance Minister Nirmala Sitharaman’s largesse of 21 trillion rupees does not translate into more money on hand for most. For example, the central government guaranteed line of credit of Rs 3 trillion for micro, small and medium enterprises (MSMEs) looks excellent. After all, there will be a one-year moratorium. But the interest will accumulate for a year and will have to be paid later. Yes, MSMEs are facing serious problems due to the shortage of liquidity, but will they borrow more, produce goods and pay wages in these uncertain times? Let’s see. Likewise, the 2 per cent reduction in Employee Provident Fund benefits for employers and employees will not benefit them too much. Either way, it’s only for three months.
The Indian economy was already suffering from a slowdown before the Covid crisis hit us. Last September, the government granted significant tax benefits to India Inc. Result: Due to reduced tax obligations, the price / earnings ratio improved. The markets cheered for a few days. But over the days, it became clear that no new investment will occur because there was no demand.
At the same time, non-bank financial companies became more stressed when people stopped borrowing and there was a general fear of lending money to these companies. When the skeletons came out of the cupboards, it was realized that many of them were riding tigers. For example, the monthly interest expense of a non-bank financial company was Rs 1,500 crore on a loan portfolio of around Rs 1 crore. This NBFC was clearly raising funds at an unaffordable rate during a falling interest rate regime.
Then the Covid-19 happened. And containment has begun. Now, after 50 days of foreclosure, a big stimulus package has been announced. But it is again focusing primarily on supply and reforms that will pay off months or years down the road.
During this time, demand has suffered greatly. Most companies, with the exception of Asian Paints, have announced cuts to wages or jobs … some severe. Even the central government and state governments have cut wages, so you can’t blame just the private sector. So in terms of income, an upper middle class family will most likely be demoted to middle class, middle class to lower middle class and so on.
So, automakers can make cars, builders can build houses, banks can lower interest rates, malls can open, and there might be big discounts at the best hotels, but few would be able or interested in spending on such luxuries. Those who do are not dependent on wages but on dividend income. Instead, there will be a drop. A user of Pears soap can opt for Lux. And a Lux user can look for comfort in Lifebuoy.
The management of these periods is an “extra-curricular exercise” for any government. But it could be a good time for free lunches and tax holidays. A one-year tax holiday for everyone or up to a certain salary level is likely to ensure that people don’t cut trade or postpone basic spending. Yes, buying a car or a house may not happen immediately, but even being able to maintain the existing lifestyle will help growth and India Inc.
Few people would like a loan now, but most need a free lunch. Since the 1990s, successive governments have sold the dream of “middle class purchasing power” to attract investment from global companies. It’s time to protect him.