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Editorial: Government Takes “Baby Steps” to Arrest Economic Slowdown

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Port Wings, 25 Sept 2019:

After months of rumbling, Government of India finally started rolling out decisive steps to bring economy back on track.

Finance Minister Nirmala Sitharaman last week rolled out tax sops for corporate companies, which is seen as a first step to win back confidence of the larger wheel of Indian economy. Ofcourse, the move kicked off storm in social media and many projected this as government’s submission before the corporate to stop the crisis.

It is a fact that there are no go-to solutions for economic crises, as every such development comes with different challenges and it’s not easy to tell which one will work best in situations.

The cycle is that when firms face higher tax rates, they reduce investment, lower employment and shift the tax burden to workers with lower wages.

According to Dr Sowmya Kanti Ghosh, Chief Economic Advisor, SBI, reducing corporate income tax will benefit workers as new investments boost productivity and lead to wage growth, which currently is growing in single digits. However, economists within and outside the government are divided on their opinions in terming economic slowdown.

Broadly, people in our country feel that demonetisation, slump in consumer demand, real estate slowdown, lesser jobs and lower investments are the basic indicators of economic slowdown.

Market experts say that the November 8, 2016 event initiated a curtailment of consumer spend in the country.

According to Siraj Hussain, former agriculture secretary, demonetisation hit farmers the most. Their crop prices crashed during the year and exacerbated an already existing farm distress scenario. With no cash in hand, farmers settled for distress sales. Experts suggest that a hit on farmers’ income levels had triggered the snowballing effect of slowdown in the Indian economy.

As a cascading effect of demonetisation, rural market started to stagnate at first, and then growth started to decelerate for most companies catering to the rural markets. And, the impact reached nationally when automobile companies started reporting huge losses and production cuts.

Furthermore, middleclass started feeling the pinch when the FMCG companies also reported stagnancy in sales.

One of the main concerns for the current economic slowdown is a sharp fall in consumer demand as witnessed by most major firms. India is still a rural-centric economy, the proof of which was witnessed this time. As the rural economy slowed, tractor manufacturers and fertilizer manufacturers felt the first impact.

It is an undeniable fact that GST and other tax reforms of the government after demonetisation also progressively drew away dispensable cash from people’s hands. Furthermore, drastic drop in number of employment, wage levels, and consumer demand took the slowdown into a new level.

Besides, problem with investments is seen as the dominant factor in economic slowdown. Investments are important to more business activities, resulting in more jobs, higher earnings and eventually higher spending. This virtuous cycle of investments is the key focus of this year’s Economic Survey as well and is credited to be the central of the government reforms.

While Union Government’s latest decision will infuse confidence among corporate, who will take care of crores of middleclass that needs such relaxation to jumpstart their economic growth stalled after demonetisation?

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