Sentiment booster

Sentiment booster

Sitharaman’s revival package can be a start.

Finance minister Nirmala Sitharaman announced an economic package which aims to arrest the drift in the economy and inject an element of positivity. It scores in terms of optics. Her package is a combination of fiscal, liquidity and administrative measures to push credit flow, mitigate problems in beleaguered sectors such as automobiles and solve coordination problems among regulators. When assessing the impact of the package it is important to acknowledge that a slowdown in India’s economic momentum goes back more than a year. Therefore, a durable revival will need many more reforms.

The automobile sector has been the most vocal in articulating its problems. As solution, the government has offered a fiscal concession in terms of depreciation rates and also suspended a proposed increase in registration fees of vehicles. The attempt to provide clarity on emission standards regulations is significant. Investments are unlikely to happen in an uncertain environment. Another area to receive attention is the credit market. It’s been hamstrung by a slow transmission of RBI’s policy signals. Now, changes attempt to push more loans towards auto and housing. Another change proposed is a front loading of the budget proposal to recapitalise banks.

Economic sentiment turned negative after the budget partly on account of enhanced tax surcharge on capital gains and foreign portfolio investors. Both have been withdrawn, which should undo some damage. The government will also back down on a draconian proposal to criminalise CSR violations. Respect for wealth creators is incompatible with punitive legislation. On balance, government must be complimented for responding to an economic problem which has a cyclical component. But the larger problems are structural deficiencies which have lowered India’s growth potential. These require a steady effort and should be the main goal of the finance minister. She may have hit a boundary, but needs to play a long innings.