Solving The Issues Of Macro Environment: Krishna Kumar Karwa, MD, Emkay Global Financial …

The government’s capacity to spend more is seriously dented by its already high borrowing programme and likely fiscal slippages.


Unlike in the recent past, the 2019-2020 Union Budget is going to be presented under tough and distressful macro-economic conditions. There is ample liquidity available in the system but credit flow to sectors such as NBFCs requires proper channelising. Retail inflation is increasing while we still need lower interest rates. The unemployment levels are high, and the industrial and manufacturing activity is at a multi-year low. The government’s capacity to spend more is seriously dented by its already high borrowing programme and likely fiscal slippages. There is a deterioration in macro variables such as aggregate consumption and investment. Rationalisation of Dividend Distribution Tax (DDT)DDT urgently requires reform which can only be done through the introduction of the Direct Tax Code (DTC). Yet to materialise, the DDT as a tax hits productivity, efficiency and creates inefficiency through multi-layer taxation. The effective DDT at present stands at 20.35 per cent. As a first step towards eliminating the inefficiencies, the tax may be abolished as it taxes the same amount multiple times. We must move on to a system where people who receive dividends may add it as a part of their taxable income and pay the applicable taxes.Room for a cut in LTCGA cut in LTCG may help add some altitude to the indexes as it invariably lifts the sentiment. Overall, there is a requirement of a cut in LTCG which may promote sustained long-term investments into equities. This may also promote more Systematic Investment Plans (SIPs), which bring in close to Rs 80 billion into equities through mutual funds.Initially, when the tax on LTCG was introduced, an income close to Rs 3.75 trillion by way of LTCG was not under the tax net. This amount needed to be taxed so that the government gets somewhere close to Rs 200-Rs 300 billion from this tax. However, a reduction in this rate from 10 to 5 per cent may promote a longer-term commitment to equities.Lower NPAs  & re-capitalisationThere is a need for recapitalising some banks that have lost capital due to heavy write-offs in the last few years. The government and the RBI also need to work on improving the system of credit administration in banks, which is an anachronic stage and also ensure accountability by credit rating agencies. According to the RBI’s financial stability report – December 2019, ‘macro-stress tests for credit risk show that under the baseline scenario, SCBs’ GNPA ratio may increase from 9.3 per cent in September 2019 to 9.9 per cent by September 2020, due to a change in macro-economic scenario, marginal increase in slippages and the denominator effect of declining credit growth.’ Doubling farmers’ income by 2022Productivity or increase in output, higher farm prices, rise in wages, and a shift in labour from agriculture to other sectors were all the key factors that influenced farmers’ income in the past two decades. The only way this can be addressed is by continuing to focus on agricultural productivity while ensuring increase in the income from allied activities such as livestock and agricultural prices are well-supported at appropriate levels. Farmer distress is more pronounced when agricultural prices fall and this requires a more scientific approach to support prices while increasing farmers’ income. The budget has a major role in taking this forward. Comprehensive reform is required. In short, the focus should be on ensuring fair prices throughout the year, shifting excess labour from farms to other segments, and enhancing the contribution of allied areas to farmers’ income.

Disclaimer: The views expressed in the article above are those of the authors’ and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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