By Adhirath Sethi Sep. 24, 2019
As the buzz around the slowdown in the economy grew louder, Finance Minister Nirmala Sitharaman took some small steps – support for the auto sector, a fine-tuning of FDI, and liquidity support for banks. And then, like MS Dhoni in the final over of a run chase, she sent the ball thundering out of the stadium with her decision to reduce the corporate tax rate.
Anyone with even a wayward finger on the pulse of the Indian economy would have sensed a weakening of sentiment over the past few months. It started with a then shocking revelation about India’s unemployment figure (it wasn’t great), which many expected might even derail Narendra Modi’s campaign for re-election (it didn’t) and kept regifting bad news with an ever-declining set of GDP numbers for us to be mopey about.
Up until the elections this year, everyone expected that any dampening in economic activity was merely the effect of a nation holding its breath until the elections were over. Like parents of an academically weak tenth grader, we all held back big-ticket purchases until results day arrived.
“When will the road be fixed?” “Not until after elections”
“When will you stop shunning your fatherly duties and attend to your child instead of sending him to the neighbour’s house every evening?” “Once Modi-ji is re-elected, I will spend more time with Bunty.”
When elections came and went and nothing happened, we decided that the budget was what we were all pegging our hopes on. When the budget came and went and nothing happened, people started getting jittery.
The government seemed to have neither the ideas nor the funds needed to electrify our economy. Each week, Nirmala Sitharaman (or NiSi, as the kids have taken to calling her) stepped up to deliver yet another policy tweak that had people wondering why she was being so press-friendly. Support for the auto sector, a fine-tuning of FDI and capital gains rules, and liquidity support for banks all seemed like steps in the right direction… but really small steps; the kind you might take if someone had tied your shoelaces together. When she announced a rather misplaced ban on e-cigarettes earlier last week, people really had begun to wonder whether NiSi was indeed vaping something super-smooth and ultra-mellow.
The brutal truth was this: The time for singles was long past due. We needed an almighty, towering heave over long-on to pull the momentum back in our favour. And then, like MS Dhoni in the final over of a run chase, NiSi planted her front foot down like a block of concrete and sent the ball thundering out of the stadium.
Regardless of what happens in the coming weeks, the decision to reduce the corporate tax rate from 30 per cent to 22 per cent is historic.
Regardless of what happens in the coming weeks, the decision to reduce the corporate tax rate from 30 per cent to 22 per cent is historic. Time will tell whether it will be enough to get us over the line, but like a typical Dhoni innings, it started slow with a flourish at the end. Expectations may slide back, and numbers may recalibrate, but September 20 will always be the day the Sensex leapt a record-breaking 1900 points and then some. It gave a much-needed exuberance to an economy that was hitherto wallowing in the kind of self-pity that would make Severus Snape seem like someone with a sunny disposition. More importantly, it made absolutely clear that the government was in no way blind to the plight of the economy and understood that a massive policy upheaval was needed to dislodge India from the rut it was in.
The layperson may be forgiven from asking the obvious question (it’s asked of Dhoni too): “If this was so simple, why not do it sooner?” Why indeed would such a bold move not have been announced back in July, when NiSi was batting on debut and would have loved to have a century to her name? Was she, in true Dhoni style, choosing the thrilling value of entertainment over the more sedate monotony of a steady run chase?
When the dust settles next week, it may be time to understand that there is never such a thing as a free lunch. The number that’s being rolled about like a bottle of Hajmola in a boy’s dormitory (#OnlyEightiesKidsWillUnderstand) is ₹1.45 lakh crore. This is the hit that the government is prepared to take in order to finance our exuberance. It is effectively the revenue that the government will forego by allowing companies to pay a lower rate of tax.
Considering the move will most likely see the government miss its deficit target by some distance, it is obvious that the decision was neither simple nor that it comes without repercussion. The deficit target of 3.3 per cent was something the government has been proudly waving as a sign that they were prioritising fiscal prudence. When the RBI released ₹1.76 lakh crore to the government in August (and I was specifically told that none of it would be used to fix the potholes outside my house), the government was clear that the money would be used to meet the deficit target rather than prop up the economy. But obviously, like the Cardi B cover of a Bob Dylan song, their tune has changed drastically.
It is clear that the immediate pressure to boost the economy outweighed the long-term aim to reduce government debt.
Truth be told – only time will tell whether this was a good move. A rising deficit may not pose any immediate threats, but too many governments have ruined their economies by procrastinating the reining in of state finances. In a nutshell, a high deficit runs the risk of a government being unable to pay back what it has borrowed. Like the credit card debt of an out-of-work Arts major, things can quickly spiral out of control. Countries like Argentina and Venezuela – apart from being famous for football and Miss World contestants, respectively – tried to pay off their government debts by merely printing more money. This led to hyperinflation and ended up ruining their currencies. Having only just figured out the shortcut for the rupee symbol on my keyboard, I really wouldn’t like to see the Indian currency suffer such a fate.
Ultimately, the government is hoping that the bull-elephant sized steroid shot that it gave to the economy will be more effective than a long-term, targeted investment approach. NiSi is banking on the hope that with more money in their pockets, private companies will look to boost investments, increase hiring, and spin the current slowdown the other way around. Does she have the astute calculation skills of MS Dhoni approaching a huge run chase? We’ll know soon. However, if companies instead opt to just hold on to the extra cash, it’s going to make things even worse than they are now.
In some sense, it can be argued, the government’s move has outlined that it has more faith that the private sector knows what to do with extra money than the government itself does. As much as my stock portfolio cheered Friday’s announcement, the idea that NiSi has more faith in me than she does in herself leaves me feeling a little bit worried. If she is, however, truly the MS Dhoni of finance ministers, we hope that much like the great captain, she has a plan that only she knows, which she will unfurl just in time to win the day.
Adhirath Sethi is a novelist based in Bangalore. When he is not writing satire, he dabbles in darkness. His latest book, Where the Hills Hide their Secrets, is a product of such dabbles..