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Arvind Virmani's comment on Indian Economy

28-Aug-2019 by Arvind Virmani

Q1: How concerned are you about the current slowdown?

A1: Much less worried now than I was 3-6 months ago. My main worry was that Govt would not understand the problems (Shock, Cyclical & Trends ) and therefore not take necessary policy action. A flurry of activity since then, including PMs interviews & FMs actions have dispelled tome of these concerns.

1a: Shock : Auto Demand time shift due to technology change from BS4 to BS6; and Price elasticity due to Regulatory cost increase of 10-13%). Surcharge on Marginal Income tax on AOPs , on top of SEBI rule changes last year. FM has removed surcharge on Capital gains tax.

1b: Cyclical: Inflation decline=> Real Interest rate up. Agro deflation & Rural demand downshift => Fiscal Policy response must be to improve Quality of expenditure to increase multipliers: ie shift from Revenue/CSS to Capital/Infrastructure expenditure and from Tax expenditures to Tax reduction.

1c: My main worry is, that Trend growth may have declined from 7.5% +/- 0.5% to 6.5% +/- 0.5%. Among the Structural Issues responsible are (a) Collateral damage from Black Money Crusade & GST complexity, (b) Effect of Tax increases in last 3 budgets (+slow CIT reduction) on Govt credibility & Entrepreneurial spirits, (c) Damage from Telephone Banking in PSBs since 2009 (eg real estate loans), Regulatory tightening, tight monetary policy => ILFS, NBFCs. (c) Agricultural Dead End (Wheat-Sugar-Rice economy) => Solution Market liberalization/reform. (d) Decline in Competitiveness => Solution Improve EoDB wrt cross border trade, Exim policy reform , Tariffs-Duties reform, CEZs/SEZ.

Q2: What more needs to be done after Friday's measures by Finance Minister to stimulate the economy?

A2: The first set of measures have been carefully designed to address shocks and cyclical economic problems without blowing fiscal restraint. Examples are the measures on cars, income tax surcharge. Two more tranches are promised by FM, one on real estate sector to deal with collateral damage from black money crusade, including RERA & demonetization. Third tranche of FM decisions on other miscellaneous issues (NBFC? Rural economy).

The problems affecting trend growth will need to be addressed in next budget and over next 6-9 months. New Direct Tax Code DTC, can be introduced in 2020-21 budget. Union Govt's GST simplification road map needs to put up to GST council for approval. Corporate Income Tax (CIT) must be reduced to 25% in 2020-21 budget and 22% thereafter. Competitive Labor & regulatory policy in Coastal Export & Employment Zones (#CEEZs) & large inland #SEEZs urgently needed

Q3: How effective do you think the RBI's rate cuts will be, and what more if anything needs to be done?

A3: Much more effective now as new Governor understands the role of long term liquidity in transmission of Repo rate signals to Lending rates. Money Supply/Monetary Base growth improves transmission. MPC must reduce Real repo to 0% (as long as inflation forecast is 4%). Ensure transmission through LT Surplus liquidity/ Growth of Monetary base at 12-15%.

NBFC issue must be solved jointly by RBI and Govt. by eliminating Systemic risk and improving transparency in short run so market can deal effectively with different risk category of NBFCs .