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Indian GDP Slowdown Can be Reversed if Both Short-Term and Long-Term Reforms are Undertaken

The fall in GDP growth is sudden and dramatic

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Indian, GDP, Slowdown
This slowdown can only be reversed if both short-term and long-term reforms are undertaken. Pixabay

Growth has momentum and slowdown has inertia. The Indian GDP growth has fallen to 5 per cent in the April-June quarter, from 8 per cent. This slowdown can only be reversed if both short-term and long-term reforms are undertaken.

The fall in GDP growth is sudden and dramatic. Till now, while only businesses were talking about the slowdown, it is now a reality for the country. People worry about how bad things are and is this bottom or the beginning of a slowdown.

There is concern about the speed and nature of the government and industry’s response, and will these actions turnaround things immediately, or not.

These concerns and perceptions need answers as they affect consumer confidence and consumption. Acknowledging the problem is not a sign of weakness or acceptance of any blame. It’s a fact that leadership in the corporate sector has failed to recognize the major transition taking place in their sector that has affected consumer demand.

Indian, GDP, Slowdown
Growth has momentum and slowdown has inertia. Pixabay

Sectoral collapse has happened because of poor business decisions in banking, real estate, construction and lately in non-banking finance companies (NBFCs)/housing finance companies (HFCs). Now all these sectors are looking for stimulus packages to bail them out from their mistakes.

Take the auto sector, for example. It did not prepare for shifts in consumer behaviour and market needs. They contribute almost 6 per cent to the GDP and offer employment to 37 million people and are clamouring for stimulus on behalf of their employees.

The stimulus has to be for both employees and corporates. The sector is asking stimulus to protect jobs, but it does not mean it will happen as they move to electric vehicles (EV).

EVs have a fraction of moving parts as compared to an internal combustion engine. The engine and drive line are two crucial components of the internal combustion engine that contribute 50 per cent of the auto component industries’ revenues. The move to EV will disrupt the supply chain of components at one end and maintenance and repair on the other. This needs specific incentives to upskill employees to maintain, repair or make electric vehicles.

Also Read- Health-Care System Discriminates against Female Patients

Upskilling of mid-level workers is the core component of all sectoral stimulus packages. The disruption in industries is not cyclical or because of economic slowdown. There is a structural shift in many industries because of technology or shift in consumer preferences. Automation is affecting jobs in both manufacturing and services, which displacement is also affecting the consumption cycle.

The stimulus for auto companies has to promote investment. India needs an investment of $40 billion in batteries for EVs. Auto companies can get incentives for making this investment. They can be incentives to shift existing production lines to electric cars.
These are, however, palliative measures and will not turnaround the economy The bigger issue is revival of consumption demand.

The government has had discussions with several sections of business and economists over the last few weeks. It has plucked out all the prickly issues which created a negative perception and eroded trust. But if a tyre is losing air pressure removing nails from the road ahead will not stop the air from leaking.

Action has to inspire confidence among consumers to spend and for industry to invest. Removing taxation on foreign portfolio investor and other prickly issues is a hygiene factor. It shows the government is correcting mis-steps faster. Addressing it within a week, which the Finance Minister Nirmala Sitharaman did shows the speed of response.

Indian, GDP, Slowdown
The Indian GDP growth has fallen to 5 per cent in the April-June quarter, from 8 per cent. Pixabay

This is important as it will bring back the confidence in the industry, investors and market. But the confidence to spend or even pay EMIs has to be restored.

It is equally important to set the right expectations for a return to normalcy or a turnaround in growth. The massive mandate this government received shows the expectation of the common man. Not setting the expectation right or distorting the timelines will not serve to inspire consumer confidence. People are pragmatic and patient if they understand the time it will take to come out of the current situation. They know there are no shortcuts out of slowdowns.

The current initiatives are either short-term measures or long-term reforms. The consolidation of Public Sector Banks (PSBs) announced on August 30, falls into the latter category. It will not turnaround the banking sector, ease the credit flow or even improve the transmission of interest cuts — the three most important problems contributing to the slowdown. The consolidation will take time.

The consolidation of the PSBs is a structural reform much needed, long overdue and may reduce the recapitalisation requirements. The governance reforms will improve the process of supervision, hiring and compensation. It will not change the credit evaluation, disbursement and monitoring of loans, which is the core problem in PSBs.

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The culture of poor evaluation of borrowers and lack of risk mitigation has contributed to the non-performing asset (NPA) mess in the PSBs. This culture cannot vanish overnight as it’s entrenched in processes and behaviour.

Banking leadership can use the disruption to overhaul the culture and build a new system and processes. If they get sucked into the merger and take their eyes off credit growth, customer retention, their merged entity will be weaker than the sum of the parts.

Both merger and governance reforms were important but are obviously not sufficient from the slowdown point of view.

To kick-start the consumption cycle money has to go into the common man’s pocket. This can happen by reducing income tax for the lowest slab, as recommended by the Direct Tax Code report. It can be done by making GST filing quarterly for MSMEs with less than Rs 10 crore turnover to ensure they survive the slowdown. The GST Council can look at reducing rate slabs and reduce the overall burden on corporates.

Immediate steps:
. Give auto sector incentives to invest and shift to electric vehicles
. Incentives to auto sector employees to upskill on electric vehicles
. Change GST collection to quarterly for companies below Rs 1 crore
. Reduce the GST slab rates
. Adopt the Direct Tax Code, cut income tax for the bottom slab
. Improve credit flow to both consumer and industry
. Reduce real interest rates by 135 basis points as cost of capital has to come down
. Change the credit culture in public sector banks
. Stimulus should drive investment, upskilling for displaced employees
. Factor market reforms, including bringing the cost of land down. (IANS)

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Advance Of Summit, NATO Pacify Trump

NATO also plans to consider a Franco-German proposal

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Flags of NATO member countries
Flags of NATO member countries are seen at the Alliance headquarters in Brussels, Belgium. VOA

As Britain prepares for the NATO leaders’ meeting outside London December 3-4, the alliance said Thursday it had agreed to redistribute costs and cut the U.S. contribution to its central budget.

NATO’s central budget is relatively small at around $2.5 billion a year, mostly covering headquarters operations and staff, and different than its defense budget. U.S. President Donald Trump often complains of inequitable burden-sharing, with only nine of the 29 member countries meeting the 2%  of gross domestic product target for the alliance’s defense spending.

Regarding the central budget, “The U.S. will pay less, Germany will pay more, so now the U.S. and Germany will pay the same,” NATO Secretary-General Jens Stoltenberg said in Paris Thursday.

The United States currently pays about 22% of NATO’s central budget. Beginning 2021, both U.S. and Germany will contribute about 16%.

NATO also plans to consider a Franco-German proposal to create a working group of “respected figures” to discuss reform in the alliance and address concerns about its future.

The announcement to reduce the American contribution is seen as a move to placate Trump, who has considered withdrawing from the alliance but has since taken credit for its promised reforms.

“In 2016, only four allies spent 2%  of GDP on defense,” a senior administration official told reporters Friday, adding that there are now nine countries, including the U.S.,  meeting the 2% target, with 18 expected to do so by 2024.

“This is tremendous progress, and I think it is due to the president’s diplomatic work,” he said.

 U.S. forces from Syria, a move Trump made without consulting NATO
A convoy of U.S. vehicle is seen after withdrawing from northern Syria, on the outskirts of Dohuk, Iraq. VOA

Internal strife

Leaders of the 29 member states will attempt a show of unity during the summit but the alliance is facing questioning about its relevance and unity, particularly after the October withdrawal of U.S. forces from Syria, a move Trump made without consulting NATO.

“It’s exactly in the wake of that decision that you had [French] President [Emmanuel] Macron say what he said about the alliance being ‘brain-dead’ and referencing the lack of American leadership in the sense of leading in a community and not just going out on your own,” said Gary Schmitt, a NATO analyst with the American Enterprise Institute.

U.S. troops’ withdrawal from Syria prompted Turkey to launch an offensive against Kurdish YPG militia in northern Syria. The move spurred Macron to vent his frustration over what French diplomats say is NATO’s lack of coordination at a political level, and triggered fear among allies that the assault will undermine the battle against Islamic State militants.

Meanwhile, a simmering war between Russia and Ukraine has become the backdrop of Trump’s impeachment, with the American president allegedly having withheld hundreds of millions of dollars of military aid to pressure the Ukrainian government to announce an investigation of former Vice President Joe Biden, a Democratic presidential candidate running against Trump. Kyiv needs the aid to counter Moscow’s aggression.

The two conflicts in Europe’s eastern and southern flank further complicate Washington’s already-strained relations with other NATO members. Meanwhile, despite American efforts to reassure European leaders of Washington’s continuing commitment, anxiety about U.S. neglect of NATO under Trump persists, said Hans Kundnani, Senior Research Fellow in the Europe Program at Chatham House.

Ukrainian President Volodymyr Zelenskiy, welcomes NATO Secretary General Jens Stoltenberg
Ukrainian President Volodymyr Zelenskiy, left, welcomes NATO Secretary General Jens Stoltenberg during their meeting in Kyiv, Ukraine. VOA

Kundnani noted a series of American officials who have come to reassure Europeans not to take Trump’s tweets too seriously and focus on what is happening on the ground, particularly the military reinforcement of NATO’s eastern flank. Still, Kundnani said that in the last year Europeans have started to realize it’s “not really good enough” and they’re now facing the “reality of the of the crisis in NATO.”

“Some of them are hoping that Trump will be out of office in in a year’s time but the real fear is that Trump wins a second term,” said Kundnani, adding that some Europeans are hoping that “U.S. gradual withdrawal from Europe” might “snap back to the status quo ante if Trump is not re-elected.”

Diverging European responses

“The upcoming celebration of NATO’s 70th anniversary will be marked by important divisions within the alliance — not just across the Atlantic, but also within Europe,” said Karen Donfried, president of the German Marshall Fund of the United States.

In Paris, the view is “strategic autonomy,” said Donfried, with many in France concluding that Washington’s security guarantee can no longer be relied on. Warsaw is promoting “strategic embrace”  developing close bilateral relationship with Trump to guarantee its own security, while Berlin is advocating “strategic patience.”

Germany in the middle is a little bit divided between the “Atlanticists” and the “post-Atlanticists,”   Kundani said, adding that “Europeans are very much arguing” about these approaches.

Donfried said that against this backdrop, NATO allies are approaching the London summit with a sense of foreboding, knowing that they carry the responsibility to articulate alliance’s common purpose and ongoing relevance.

“If they don’t, [Russian President Vladimir] Putin will be raising a glass in Moscow to the fraught state of the alliance at 70,” she said.

Another summit goal for most European leaders, is to simply avoid a Trump flare-up, like those that have happened in past meetings.

NATO meetings
President Donald Trump meets with British Prime Minister Boris Johnson at the United Nations General Assembly, New York. VOA

Many have discovered this can be achieved through flattery. “They can talk about all the things that they’ve done and very smartly suggest that President Trump has generated the kind of pressure to make those things happen,” Schmitt said.

“They can actually praise President Trump, even though this is very hard for them to do because of the personality clashes.”

Many will be watching Trump’s encounters with Macron, including their bilateral meeting, as well as with British Prime Minister Boris Johnson. Johnson has pleaded for Trump to stay out of the upcoming British election during his London trip.

The senior administration official said that Trump is “aware of this” and “absolutely cognizant of not wading into other countries’ elections.”

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Other potential clashes are simmering too. Turkish President Tayyip Erdogan said Friday that Emmanuel Macron’s NATO “brain-death” warning reflects a “sick and shallow” understanding, telling the French president “you should check whether you are brain dead.”

The French foreign ministry has summoned Turkey’s ambassador to Paris to protest the statement. (VOA)