Modi government’s slowdown package will fail because it ignores demonetisation, GST

15 October 2019
Workers wait to be picked up from the Daimler India commercial-vehicles manufacturing plant in the Oragadam district of Chennai, in late August. The auto industry is one of many sectors of the Indian economy where demand has reduced drastically, suggested that consumers are unwilling or unable to spend. But the government’s proposed solutions do not appear to address this fall.
Dhiraj Singh / Bloomberg / Getty Images
Workers wait to be picked up from the Daimler India commercial-vehicles manufacturing plant in the Oragadam district of Chennai, in late August. The auto industry is one of many sectors of the Indian economy where demand has reduced drastically, suggested that consumers are unwilling or unable to spend. But the government’s proposed solutions do not appear to address this fall.
Dhiraj Singh / Bloomberg / Getty Images

The finance minister Nirmala Sitharaman made a startling announcement on 20 September. She declared a drastic reduction in corporate tax. With cesses and surcharges included, companies were effectively paying 34.9 percent of their revenue in taxes. After the cuts Sitharaman announced, this rate would come down to 25.17 percent. In recent months, it has become clear that Indian economy is experiencing a worrying slowdown. The initiative was meant to counter this. The government likely expected that tax cuts would help shore up companies’ bottom lines, encouraging them to undertake measures that boost the economy—commonly, this includes doling out larger discounts to consumers, increasing workforces and bumping up capital expenditure, among others. The announcement sent markets into a euphoric frenzy, pushing the Sensex up by 1,800 points, its largest surge in five years.

Sitharaman had previously appeared keen to divert attention away from the slowdown. In early September, even after India’s GDP growth rate fell from eight percent to five percent in five quarters, the finance minister skirted questions on the economic decline during press interactions. Another example was her response to the crisis in the auto industry. In August, overall vehicle sales recorded the steepest fall in the 22 years since the Society of Indian Automobile Manufacturers, an industry body, began recording this data. Domestic car sales fell by a whopping 41 percent compared to August 2018. For the same month, commercial-vehicle sales dropped by over thirty-eight percent while motorcycle and scooter sales separately fell by a little over twenty-two percent each. In August, India’s largest personal-vehicle manufacturer, Maruti Suzuki, decided against renewing the job contracts of 3,000 casual workers, owing to a decrease in demand. In a regulatory filing in September, the commercial-vehicle manufacturer Ashok Leyland declared that the company would observe 52 non-working days—an unpaid day off for its workers—across its manufacturing hubs in India, “due to continued weak demand” for its products.

In mid September, Sitharaman claimed that sales of four wheelers were falling in part because millennials preferred cab-aggregators to buying cars and paying monthly instalments. Her comments served only as misdirection from the real reasons behind the decreasing demand. In fact, a survey of the age group in question contradicts the conclusive diagnosis that the finance minister offered. A 2018 survey of millennials by Mint and YouGov, a British market-research company, that engaged 5,000 respondents across 180 cities, reportedly found that a little over eighty percent of the millennials residing in urban areas aspired to own a personal vehicle.

Though the government’s refusal to acknowledge the extent of the slowdown was worrying, its solutions are cause for even graver concern. The government appears to believe that the ongoing crisis can be remedied by giving concessions to the corporate sector—effectively, that companies will pass on the benefits of the tax cuts to ordinary consumers, and that the money that the corporates save will trickle down into the economy. This is in line with the BJP government’s proclivity to favour corporates, but in reality, it is a misdiagnosis. It ignores the undeniable fall in demand across various sectors in rural and urban areas, and does not address the unorganised sector, which forms a significant part of India’s economy. At best, the government has an incomplete understanding of the trouble that the economy is in. At worst, it is not only favouring corporates, but is wilfully obfuscating the impact of two of its grandest policies: demonetisation and Goods and Services Tax, or GST.

Kaushal Shroff is a staff writer at The Caravan.

Keywords: economic crisis demonetisation GST Rural Economy unorganised sector Nirmala Sitharaman
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