CA Vinit Vyankatesh Deo, Chairman, Posiview Group gives 5 reasons why another Tax & Spending based stimulus to boost demand may be in pipeline.

Demand for Demand generation not met

A Stimulus has 3 objectives viz. first Liquidity in the system to keep it functioning, second measures to boost demand and protect existing industries and third encourage new Investment. All the measures announced by the Finance Minister and the Reserve Bank of India deal with the 1st and 3rd objective ie Liquidity and Investment but completely miss out on the middle i.e. boosting demand. It is unlikely that the Government has inadvertently missed this part when it has gone to the extent of announcing investment measures for everything from bee-keeping to space exploration.

No Fiscal Stimulus

Existing Industries which form the bedrock of the economy such as Real Estate, Automobiles & Other Manufacturing, Travel and Tourism, Trading, Hotels & Restaurants, Textiles etc have not received any direct fiscal stimulus. Many of them such as Hotels will be suffering permanent losses which will never be recouped. Hence some support for payment of wages, exemption and not just deferment of interest on loans will need to be given to keep them afloat.

Mystery of the missing Middle Class

It is interesting to note that not a single measure has been announced for the middle class which contributes to majority of the consumption and taxes. The liquidity measures will not have any meaning if the Banks and Financial Institutions do not believe tha its safe and viable to lend to Industry. Retail loans are a nearly Rs 50 trillion plus markets with over 60 million accounts added annually. This entire market will also come pressure as the bulk of the retail accounts are middle class and MSMEs.

Central & State Government’s Borrowing Limit 

Central Government announced earlier this months that it will borrow an additional Rs 4.2 trillion taking the fiscal deficit target to 5.5% from the 3.5% as declared in the Budget 2020-21. In the last tranche of the Stimulus announced today, the borrowing limit for the States has also been increased from 3 to 5% of GSDP this creating a fiscal space of another Rs 4 trillion in State Budgets. According to estimates, the stimulus measures announced till yesterday had a fiscal impact of not more than Rs 1 trillion. Hence, the Government has leg room for fiscal measures such as incentives to home buyers, tourists, retail consumers etc as well as a meaningful cut in personal income taxes and select GST taxes to spur consumers to buy.

Sanjeev Sanyal’s Calibrated Approach ? 

In an interview to Times Now on 28th April, the Principal Economic Advisor Mr Sanjeev Sanyal had said “We will boost demand, make structural reforms as the need arises. A graded approach will take in account the data from all districts.” Now that the liquidity and investment measures are out of the way, the health systems have been geared up, would the next step in this path be a big bang fiscal stimulus.

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Author Name:

CA Vinit Vyankatesh Deo
Chairman, Posiview Group
www.posiview.in
+918975761062

Source : The Posiview

Link : .