Will Nirmala Sitharaman’s last-mile gambit pull the economy out of slump?
In another episode of sector-specific reforms to arrest the current economic slowdown, finance minister Nirmala Sitharaman announced measures to revive growth in the housing sector and to push for greater exports.
The measures featured: an ease in foreign borrowing norms for those looking to invest in affordable housing projects; Rs 20,000 crore for last-mile funding of housing construction, and significant changes in tax exemptions up to the range of Rs 50,000 crore to benefit exporters in.
Downside in exports
A new scheme, the Remission of Duties or Taxes on Export Products, will replace the Merchandise Export from India Scheme (MEIS). While this step will lead to a revenue foregone up to the range of Rs 50,000 crore, the effect of this in boosting exports, especially in areas of textile (of non-readymade garments), remains unclear.
A closer look at the Indian exports may help one acknowledge that the last few years have seen a negative Current Account Balance, with a poor export performance trend. In fact, over the last five years, Indian exports have performed dismally across all markets. One of the key concerns in this regard has been the worsening of ‘farm-to-factory’ production line, which in an agrarian economy like India’s, helps in boosting agri-based exportables in regional markets.
India’s agriculture sector and manufacturing sectors (those that depend on agri inputs) have been witnessing a slowdown with declining incomes. It is understandable to see the wrath of sector-based performance declines on the aggregate export performance levels too.
Further, an overvalued (and a poorly competitive) position of the rupee within other exporting markets, hasn’t helped India’s export scenario as well. It is also useful to highlight that while big-bang incentives through tax exemptions are often argued as the ‘most ideal’ scenario for textile-led (or other medium scale) export productions, a reflection from ex-chief economic advisor, Dr Arvind Subramanian’s own Economic Survey study — released a couple of years ago — offered some useful insights on how most export tax exemption packages don’t work as desired.
For example in June 2016, the Union Cabinet announced a Rs 6,000-crore package for the apparel sector. The largest component of this package included rebates on state levies (ROSL) in an attempt to offset indirect taxes levied by the states (when VAT was there) that were embedded in exports. After the package, the ROSL increased export incentives from 2.8 per cent to 3.9 per cent. Subramanian’s team, in testing the success of this export package, highlighted how “the package increased exports of readymade garments (RMG) made of manmade fibres (MMFs)”, but made no “statistically positive impact” on ready-made garments made of other fibres (silk, cotton etc.), and the impact man-made fibres increased gradually over time, by September 2017.
Need for reforms
India’s export scenario requires a stew of micro reforms, accompanied by a more flexible exchange rate design that allows India’s farm-to-factory product line to become more export oriented, especially in the regional markets (and in boosting ties with countries like Sri Lanka, Bangladesh, Nepal, Myanmar, to name a few).
However, additional measures in provisioning of higher insurance cover, more regular shopping festivals (in line with Dubai’s annual shopping festivals), monitoring of export finance, and ‘turnaround times of ports and airports’ will gradually help in improving export competitiveness from a macro-standpoint. Having said that, in current scenarios of pessimistic performance trends, the extent to which macro measures alone can help deal with structural economic problems or ones that can push for a higher growth trajectory in potentially higher export areas (agriculture, manufacturing, textiles), remains to be seen.
Long-term scenario
On measures to boost investment in real estate sector and government’s affordable housing plan, these warrant a separate mention. The finance minister announced a last-mile Rs 20,000 crore package with a target to benefit around 3.5 lakh homeowners. While the government would contribute around Rs 10,000 crore to this fund, investors like LIC, Development Finance Institution (DFI) and sovereign wealth funds are likely to contribute the rest of the Rs 10,000 crore.
The ‘last-mile’ window, on the face of it, is likely to help provide the necessary funding for healthy housing projects which are in the non-NPA pegged category (and those at the last stage of completion). The requirement of these in the middle-income (affordable) categories is likely to benefit more middle-income homebuyers.
As of now, around 8.5 lakh flats are stuck across the country — and a last-mile funding is likely to help boost their demand. Furthermore, the lowering of home loan commercial bank rates (now almost down to 5.5 per cent level) will subsequently compliment the increase in housing demand (and supply) eventually.
At the same time, apart from the sectors that the finance minister emphasised on, a few key macro trends that still need greater monitoring and policy attention (in context of the economic slowdown) include: decline (and near stagnation) of rural and urban wage growth levels; along with a rising divergence seen in urban and rural inflation trends, along with lowering of household saving levels and private consumption expenditure.
(Courtesy of Mail Today)