Revival of Economy

Amidst precarious global growth, India’s GDP growth plummeted to a 6-year low of 5% in Q1,FY20.

- Dhritiman,Chakraborty

The slump is attributed to tepid investment and weak consumption demand. Manufacturing grew by a paltry 0.6% while farm sector witnessed a growth of 2% during the same period. In its FY19 annual report, RBI said that the slowdown is primarily cyclical. However, structural headwinds in the form of weak propensity to consume is discernible.

In order to recuperate the flagging economy, a pragmatic mix of both monetary policy and fiscal policy is warranted. Factoring the benign inflationary pressures and moribund growth conditions, RBI maintained a dovish monetary stance. Since Jan 2019, RBI has reduced its policy rate by 110 bps. Another 25bps cut may be in the offing on Oct 4 when RBI announces its 4th bi-monthly monetary policy statement. The Government too, announced a slew of measures to infuse liquidity and revive sentiments. Notable amongst them are the revoking of enhanced surcharge on capital gains on equities for FPIs/domestic investors, frontloading of Rs 70,000 Cr of additional capital for public sector banks, withdrawal of angel tax provisions for start-ups, Rs 20,000 Cr of extra liquidity for HFCs, additional 15% depreciation for vehicles acquired from now till 31st Mar, 2020, amalgamation of public sector banks (post consolidation, there will be 12 PSBs). The measures, however, didn’t prop up the sentiments significantly.

On Sep 20, the Finance Minister announced slashing of corporate tax rate to 22% (effective 25.17%, w.e.f Apr1, 2019) from the base rate of 30% for all companies subject to the condition that no incentives or exemptions shall be availed. New local manufacturing companies, incorporated on or after Oct 1, 2019 shall be taxed at 15% (effective 17.01%) and need not pay Minimum Alternate Tax (MAT). For companies which continue to avail exemptions/ incentives, the MAT rate has been reduced from 18.5% to 15%. This will make Special Economic Zones (SEZs), a preferred place for export-oriented units.