PSB Mergers Not Enough, Govt Needs to Give Tax Relief for Recovery

Selecting the biggest news story of Friday, 30 August, can spark a hotly contested debate – is it the fact that the GDP growth rate for first quarter of FY20 slumped to near seven-year low of 5 percent or the central government’s decision to merge 10 public sector banks (PSBs) into four entities.

However, one thing is clear. It is now beyond debate whether or not there is a slowdown in the economy.

GDP data suggests that manufacturing and agricultural output have been severely hit but the most alarming fact is that private consumption has come down to 3 percent, from 7 percent in the same period last year.

Consumers are now faced with a dilemma, on whether to buy products in the lead up to the festive season or to hold off, since the market is expecting deep discounts from companies to shore up sales.

If the consumers continue to be cautious, it will reflect poorly in the demand trajectory over the next few quarters as well.

One might also suggest that the government has finally acknowledged the slowdown in the economy. However, the question remains – whether the steps taken by the government on Friday will boost consumption or demand?

To answer that question, the FDI-related announcements will not boost consumption immediately, as these are long-term projects.

As for the merger of PSBs, the government might project it as a ‘big bang’ reform, but this was always on the cards. Two mergers have already been announced in the last two years and Friday's announcement is part of an ongoing process.

These announcements were in the making since January but were kept in hold in the lead up to the elections. In fact, coming three months after the government swore in, the announcement is rather delayed.

As far as the decision to scrap FPI surcharge is concerned, there is bad news in those quarters too, since the FPIs have emerged as net sellers in the equity markets this week.

It is expected that more such announcements will be made in the coming few days, aimed at improving the sentiments of MSMEs and the urban-middle class.

Experts suggest that the core solution hinges on whether the government is ready to provide deep cuts in the taxation system, which in turn will boost consumption, demand and investment.

At a time when the government has received a huge bounty from the RBI in the form of surplus transfer, it should consider providing relief in the tax rates.

It is also meaningless to say anymore that the slowdown in the economy is a cyclical one and not structural and that the economy is affected by global headwinds.