Suggestions for stimulating the economy
The number of people cautioning about a deeper and longer
economic slowdown in India is rising by the hour. Tata Motor's management has
guided for double digit fall in automobile sales in FY20 (see
here). Most auto companies have announced shut downs; some have also
announced significant reduction in the employed workforce. SBI chairman is
insisting on urgent need for some stimulus in almost each of his public
presentations (see
here). Most other senior banks and industrialists have also sounded the
caution begul (see
here)
The stock markets have corrected sharply in past one year;
though the benchmark indices may not be reflecting the correction as yet. The
wealth erosion for investors has been material. The market participants are
clamoring hard for a stimulus package to bring the economy and market back on
path of high growth.
Whereas, most businessmen and market participants have echoed
the demand for stimulus, I have not seen many actionable solutions being
suggested. Generally the solutions suggested are limited to lending rate cut,
GST rate cut, and roll back of tax provision relating to surcharge and long
term capital gains.
In my view, roll back of the tax provisions relating to long
term capital gains and surcharge on high income non corporate entities may not
add to the economic growth in any significant measure, though it might be a
short term sentiment booster.
As per the available data, SBI has already cut MCLR by about
30bps post recent repo rate cut of 35bps. Current SBI MCLR (8.25%) is now
~100bps lower than the highest rate seen in early 2016. However, the current
interest rate is still 300bps higher than the lowest rates we saw in 2003.
Given the persistent low inflation, low money multiplier and global strong
deflationary trends, there is scope for meaningful rate cut. To be effective
immediately this rate cut must have some shock value. Small doses of 10-20bps
cut in lending rate may take much longer to reflect in higher demand and
therefore may not qualify as "stimulus".
A material cut in GST rates for automobile etc may stimulate
demand. However, the impact may be somewhat neutralized as lower GST revenue
shall constrict government's spending ability. In case the government chooses
the path of fiscal expansion through additional market borrowing, the private
investment may get crowded out. GST rate cut therefore may not be an easy
option for the government to exercise.
I believe the government needs to take these conventional
stimulating measures steps in adequate quantity. However, to enhance the impact
of these measures, a number of additional measure aimed at boosting
sentiments and stimulating higher trade volumes and activity level would
be needed simultaneously.
The following are some of the illustrative measures that could
be considered by the government for immediate implementation:
(a) In most parts of the country,
the Ready Reckoner or Circle Rates (minimum property rates considered for
levying stamp duty) are much higher than the prevailing rates of property. The
government must consider bringing this minimum threshold to 10% below the
prevailing market rate to stimulate transactions in property market.
(b) Capital gains of upto
Rs25lacs on all constructed properties may be exempted from income tax for two
years, i.e., AY21 and AY22.
(c) Capital gains on sale
of gold may be exempted, provided the entire sales proceed is invested in
buying one or more constructed property (residential or commercial).
(d) Concessional Housing
advance by companies to their employees in next 2years may not be treated as
perquisites during the term of the advance.
(e) Trading in agri
commodities may be exempted from cash transaction limits completely for 2yrs,
i.e, till March 2021. Post that restrictions may be applied in graded manners
over next 5yrs.
(f) GST input credit for
automobile purchase may be allowed for six months, i.e., October 2019 to March
2020.
(g) Upto 50% discount may
be offered on power tariffs to all green field industrial units that are
approved before March 2020 and begin commercial operation before March 2022.
(h) The payment time for
all government contracts and supplies may be cut to 15days from the present
60-180days. All outstanding payments to contractors and suppliers may be
released immediately. The arbitration and legal awards in favor of the
contractors and suppliers may be honored immediately.
(i) PSU banks may be
adequately recapitalized immediately.
(j) Long term corporate
bonds (10yrs or more original maturity) may be treated at par with equity for
capital gains taxation purposes. Periodic Interest on such bonds may be taxed
@10% without any limit.
(k) CSR spend in setting up
rural schools and health centers may be made tax deductible at 125% of the
amount spend. The operating and maintenance expenses on such schools and health
centers may also be made tax deductible.
(l) 25% capital subsidy
may be provided to agri produce processing units set up in the rural areas,
provided the farmers who would supply agri produce for processing to such
industrial unit form a cooperative society; and such cooperative society is
allotted 25% equity in such unit free of cost. Gram Sabha land may be leased to
such industrial units at nominal rent.
(m) The government may make
a solemn promise that the effective rate of direct taxation for any assessee
shall not rise for next 3yrs
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