GS-III: Government responds to the downturn with steps to boost growth

Context

The announcements come at a time when the perception that the slowdown has been aggravating in recent weeks and spreading across sectors. Finance Minister Nirmala Sitharaman announced a partial rollback of the enhanced surcharge on foreign portfolio investors (FPI) levied in the Budget and indicated a review of the surcharge levy for high net worth individuals as well.

Announcements

• Surcharge on long and short term capital gains arising from transfer of equity shares has been withdrawn.
• The CSR violation would be treated as a civil offence, and not a criminal offence.
• The FM announced a slew of measures aimed at boosting a flagging domestic economy.
• This includes an assertion that ICE (internal combustion engine) vehicles will coexist with EVs (electric vehicles) and that there is no phasing out of ICE vehicles, a fear expressed in certain quarters of the auto industry.
• Banks would also be asked to pass on the full impact of the interest rate cuts to consumers.
• Repo rate-linked loans.

Loans, repo rate

• Loans for home, vehicles and consumption goods to become cheaper and widely available through banking and non-banking finance companies.
• Banks will launch repo rate and external benchmark-linked loan products that will lead to reduced easy monthly installments for housing, vehicle and other retail loans.
• Working capital loans for industry to become cheaper.
• Public sector banks (PSBs) will ensure mandated return of loan documents within 15 days of loan closure.
• NBFCs will be permitted to use the Aadhaar authenticated bank ‘Know Your Customer’ (KYC) to avoid repeated processes.

What is the surcharge that’s been withdrawn?

• The surcharge of 3 per cent and 7 per cent on those earning between Rs 2 crore and Rs 5 crore, and over Rs 5 crore respectively had been announced by Sitharaman as part of her Budget proposals.
• This had led to different taxation outcomes for FPIs registered as Association of Persons or trusts and companies, even as those registered as companies were spared of this surcharge.
• Ever since the budget announcement, markets have been seeing a selloff on most trading days, largely in light of the FPI impact.

Why was the CSR announcement controversial?

The amendment to the Companies Act, passed earlier this month, introduced harsh penalties including jail terms for non-compliance on CSR (corporate social responsibility) by listed companies. This had been slammed by the industry as a regressive move, especially given the fact that in the last five years, the total CSR spend of companies has progressively jumped from 70% to over 90% now, according to data sourced from Prime Database.

Conclusion

For an economy that is downbeat in growth and in sentiment, the comprehensive package of measures announced by Finance Minister Nirmala Sitharaman on Friday may just be the right boost. They address growth slowdown concerns free up funds for investment and spending by banks, housing finance companies and MSMEs and importantly, undo some controversial proposals, in the budget and outside it, which were affecting sentiment in the markets and the corporate sector. And, importantly, these have all been done without any significant financial burden on the government. Some of the measures promote the ease of doing business and even the ease of living for ordinary citizens.