economic-revival-package

The Union Government announced several measures through an economic revival package stimulating economic growth and markets. The booster package includes several steps from withdrawing of higher taxes for foreign portfolio investors (FPIs) to bank recapitalization funding. The article provides for an in-depth analysis of the economic revival packages, needs for its announcement and benefits behind the move.  What is ‘Economic Revival Package’? 

  • The economic revival package is a stimulus program reviving growth and strengthen the country's position as a global investment destination.
  • The package works on economic situations like the issues faced by various sectors also suggests various possible interventions to boost demands and portfolio investments.
  • The Indian Government, on August 23, announced a raft of measures through the package, which includes,
    1. Super-rich tax on foreign and domestic equity investors,
    2. Exemption of startups from ‘angel tax’,
    3. Addressing distress in the auto sector,
    4. Infusion of ₹70,000 crore to PSBs,
    5. Cheaper loans
    6. GST refunds to MSMEs
  • The measures will help to boost economic growth and will ensure continued economic expansion.
Why ‘Economic Revival Package’ in India now?
  • Revive economic growth and markets and ensure continued economic expansion. India’s GDP growth in January-March slid to a near five-year low of 5.8%, and most analysts expect data due later this month to show that growth in April-June faltered even further.
  • Strengthen India’s position as a global investment destination.
  • Address the concerns over the economic slump and falling growth forecasts by the RBI and the IMF.
  • Addressing the slowdown in the auto sector and address some industry-specific measures.
  • Domestic passenger vehicle sales, a key economic indicator, plunged an annual 31 percent in July - the steepest recorded pace of decline in nearly two decades.
  • Companies have already started to cut their workforces. The auto sector alone has laid off about 350,000 workers since April.
  • A Decline in volume growth in fast-moving consumer goods (FMCG) companies. Even companies like cookie maker Parle - which sells biscuits for as little as 5 rupees, or 7 cents a pack - have warned they may have to lay off up to 10,000 workers, due to weakening demand.
  • To revive demand, credit from banks.
  • The clamor for fiscal stimulus has been getting louder globally. Even some members of the Reserve Bank of India’s monetary policy committee (MPC) had suggested a coordinated policy action, which involves fiscal measures, along with rate cuts. 
  • International investment sentiments have become negative due to an increasing tussle between major economies like the US and China. It has created a negative and uncertain environment for investment.
  • Even though interest rates have been reduced 4 times by the RBI, effects of these cuts have not been effectively transmitted to its real economy. Out of the cumulative 75 basis point repo rate cut in the February-June period, only 29 basis points were transmitted.
Fiscal stimulus announcement by global economies 
  • Global economies are anticipating a slowdown and to stimulate their economies to bear the blow of any possible slowdown, they have started announcing fiscal stimulus packages.
  • Thailand has announced a THB 316 billion stimulus package with subsidies for farmers, cash handouts for low-income earners and domestic tourists. In Europe, Germany has started to prepare for fiscal stimulus in the event of a recession, a scenario the Bundesbank no longer considered improbable. 
The Keynesian theory behind the Economic Revival Package:
  • Keynesian economics is a theory that says the government should increase demand to boost growth. Keynesians believe consumer demand is the primary driving force in an economy. As a result, the theory supports the expansionary fiscal policy. Its main tools are government spending on infrastructure, unemployment benefits, and education. 
  • Aggregate demand is the total spending on goods and services by the private sector and the government.
  • As explained under the Keynesian economic model, the demand and the total spending on it, determines all economic outcomes, from production to employment rates.
  • The Keynesian economic model offers a solution for economic problems like economic slowdown, investments, and banking in two various forms:
    • Fiscal Solutions:
      • The national government through its fiscal policy can either come with the increased government spending on things like infrastructure or in the form of the tax cut.
      • It helps in injecting more demands in the private economy and support and strengthen economic activities.
      • The increase in government deficit spending as an aggregate demand helps in alleviating economic downturns, promoting economic growth.
    • Monetary Solutions:
      • Monetary reforms allow individuals and businesses, more access to loans and thus an accessible spending power, increasing the total money supply in the economy by lowering the interest rates.
    • Theory of ‘multiplier effect’:
      • The Keynesian theory argues that government spending through each dollar increases the aggregate demand by one dollar.
      • The multiplier effect helps with running the cycle of demand and supply through the boost of government spending.
      • Each dollar in public works projects through labor, materials, and services inputs money in the market, which results in further investments.
How Keynesian theory helped the Indian Government for the ‘Economic Revival Package’:
    1. Super-rich tax on foreign and domestic equity investors:
  2. Government, reviving its fiscal policy, has removed surcharges on capital gains tax for transfer of equity shares.
  3. It also provisioned for the creation of a credit default swap market which will deepen the bond market.
  4. Easing tax liabilities and addressing the ongoing concerns of tax harassment by tax officials, the Government has also eliminated debenture redemption reserve requirements.
  5. The domestic investors are also relaxed with the withdrawal of surcharges.
  6. It will help in bringing the offshore rupee market to the domestic market.
  1.   Exemption of startups from ‘angel tax’:
  • In a major relief to entrepreneurs and start-ups, the Government has withdrawn the ‘angel tax’ for start-ups and their investors. 
  • Through the move, the Government has supported entrepreneurs and innovations, allowing them for tax-free startup capital.
  1.   Addressing distress in the auto sector:
  • The Government canceled its decision for raising the one-time registration fee on vehicles until June 2020.
  • The Government also allowed the BS-IV vehicles, which are bought before April 2020, to remain operational for their full period of registration.
  • The Government also allowed the continuation of the registration of both electric and internal combustion vehicles.
  • The Government will now focus on setting up of infrastructure for promoting electric vehicles and development and export of components like batteries.
  1.   Infusion of ₹70,000 crore to PSBs:
  • The Government in its economic revival package announced for the capital infusion of Rs 70000 crore in PSBs, which will help in boosting public sector banks and improving liquidity situations.
  • With the “Keynesian ‘multiplier effect’”, the move will generate additional lending and liquidity, of nearly Rs 5 lakh crore, in the financial system. 
  1.   Cheaper loans:
  • The RBI through the monetary policy has instructed the banks to pass the benefits of MCLR reductions to all borrowers.
  • PSBs are instructed to return loan documents to customers within 15 days of loan closure.
  • The RBI has also instructed for launching repo rate and external benchmark-linked loan products to ensure a reduced easy monthly installment of loans.
  1.   GST refunds to MSMEs:
  • The Government following the recommendations of the U. K. Sinha Committee has cleared that the MSMEs will be eased for the credit, marketing, technologies and delayed payments within 30 days.
  • It has instructed the tax department to clear the currently pending GST refunds within 30 days and the GST refunds hereafter will be cleared in 60 days of applications.
  • The Government will also consider an amendment to the MSME act to observe a single definition.
Other provisions in the package:
  • CSR violations unlike the Budget proposal, as a criminal offense, will now be treated as a civil offense.
  • The Government has also proposed to form the task force to finalize ways to propose infrastructure projects to accelerate capital expenditure and investments.
What would be the benefits of this announcement?
  • The revivals will strengthen India’s position as a global investment destination.
  • Easing the tax norms for FPIs and domestic investors in the equity market, the revival package will send a positive message for investors at the global level.
  • The withdrawal of angel tax will support entrepreneurs and startups in innovations and generating capitals.
  • The move will step further in ease of doing business policy targets of India, attracting investments.
  • It will also help in achieving progress in international rankings in various reports and allow India to grow with a faster pace than ever. 
Criticisms 
  • In India’s case, based on the current fiscal health of the states and the Centre, there is limited legroom, any deviation from stated fiscal deficit targets can impede monetary policy transmission.
  • This announcement is also a ‘U’ turn from the stated government stand of discouraging any industry-specific stimulus package.
  • Recently Chief Economic Advisor K Subramanian had spoken about India Inc’s tendency to “privatize profits and socialise losses” and warning industry against expecting a sector-specific stimulus package.
  • Many of the government proposals made in the maiden Budget speech just last month have been either withdrawn or postponed.