Skip to main content
Disciplines
Automotive Business IT + Informatics Construction + Real Estate Electrical Engineering + Electronics Energy + Sustainability Insurance + Risk Finance + Banking Management + Leadership Marketing + Sales Mechanical Engineering + Materials
Events
DE
EN
Books
Journals
Topic Page
Marketing
Start single access now
Access for companies
EXTENDED SEARCH
Log in
Top
Published in:
Introduction Read chapter Read first chapter

2022 | OriginalPaper | Chapter

6. Policy and Analyses

Author : Sebastian Morris

Published in: Macroeconomic Policy in India Since the Global Financial Crisis

Publisher: Springer Nature Singapore

Log in

Activate our intelligent search to find suitable subject content or patents.

search-config
loading …

Abstract

Here, we bring out the key influences, both shocks and policy changes, that account for the performance of the economy brought out in the earlier chapters. Being an analysis of the dynamics of the short run, the focus is on demand and its determinants. Structural policies and changes are covered to the extent that they have a bearing on the demand. We cover both the financial market side (including the global market) and the goods and services market. The emphasis is on the policy though since the Indian economy being small in relation to the rest of the world, there is always a policy response that is possible to keep growth at high rates, given also its emerging character—the availability of idle and underutilized labor. The fiscal stimulus provided to counteract the GFC was what kept growth rates at a high level of 9% in 2008–09 and 2009–10 and part of 2010–11. The near simultaneous withdrawal of the fiscal stimulus and the monetary contraction (to fight largely a supply-side inflation that was also overestimated), c.2011–12 was the immediate reason for the sharp decline in investment and in output. The problems were compounded by the so-called “policy paralysis” brought about by a spate of bans and governance issues in the telecom and mining sectors. However, the suddenness of the monetary squeeze when the rest of the world was still in a situation of ample liquidity braked investments generally and brought many of the investment projects in infrastructure including PPPs to their knees. Many had built in debilities but not all. The feedback effect from problematic design to a high interest rate regime put pressure on the banking system to which the risks had been shifted. The uncompensated demand reduction due to the success of the GST was an issue. Most initiatives of the Modi Government, despite their potentially very large public and social value, did not have the necessary basis in design, organization, policy and law, and as such had little impact. The fiscal side too was conservative with the large reduction in the MGNREGS allocations, and the underspending vis-à-vis budgets in a period when “animal spirits” were down.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

  • über 102.000 Bücher
  • über 537 Zeitschriften

aus folgenden Fachgebieten:

  • Automobil + Motoren
  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Elektrotechnik + Elektronik
  • Energie + Nachhaltigkeit
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Maschinenbau + Werkstoffe
  • Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

  • über 67.000 Bücher
  • über 340 Zeitschriften

aus folgenden Fachgebieten:

  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Versicherung + Risiko




Jetzt Wissensvorsprung sichern!

inform now
previous chapter Inflation and Monetary Developments
next chapter Reflexive, Not Reflective Monetary Policy
Footnotes
1
We believe that the real GDP growth would only have been 4% had not the stimulus measures been pursued, due to the effect of all external shocks – especially emanating through the current account. Estimates have no-counteraction GDP growth have ranged from 3.5 to 4.5%.
 
2
Thus, over the past year and a quarter it had increased the repo rate by 325 basis points. “’This stiff dose will dampen corporate sentiment and affect the investment climate’ says R Shankar Raman VP and CFO designate, L&T. ‘Sectors, which are most leveraged like infrastructure, real estate and finance will be impacted.’ ‘The magnitude of the rate hike is complete surprise’ says Seshagiri Rao, joint managing director and CFO of JSW Steel. It will put a burden on long-term financing of companies, pressure on margins and slow-down in the expansion plans, he adds. India Inc. has been cautious on expanding due to several rounds of rate hikes in the past one-and-a-half years. Data for the January-March quarter show that new project investments made by India Inc was the lowest in seven quarters, while the value of projects shelved was the highest in eight quarters.” (ET Bureau, 2011).
 
3
“‘I would call the rate hike madness. It will kill industry and investments’, [says Sebastian Morris]… ‘Indian inflation is a product of higher crude and agri-product prices and fund flow from NREGA'…’Inflation in India is not driven by demand’ (ET Bureau, 2011). Shetty (2013) writing a little later, called this sharp tightening as arising out of the “fever of independence”.. [He writes]. In pursuit of the notion of central bank independence, the RBI has taken steps that have contributed to a decline in investment and a slowdown in growth. It is time the RBI accepts once again that one of its main roles is to maintain the flow of credit to the productive sectors”. This is all the more important when so much of the productive sector being small, depend upon the banking sector for their funds.
 
4
This could also have been the result of conviction that the growth (as indicated by the new series) being high was in contradiction to the findings of the PES, to delay the release by a quarter or so at best. Continued non-release though put doubt on the intentions of the government.
 
5
Much the same approach and attitude has continued into the COVID-19 Crisis to make the government’s response so utterly at divergence to what is required.
 
6
Now with the COVID-19 Crisis, the allocations under the NREGS are expected to double.
 
7
Apparently with the COVID-19 Crisis, government has put a hold on this increase.
 
8
Thus, Dr. Suresh Prabhu, one of the very able ministers, who talked of incentives and structural changes, nevertheless could not see the instrumentality of exchange rates, in a interview with Mr. Prannay Roy of NDTV, at a time when world imports had picked up quite substantially. See NDTV (2018).
 
9
They proposed a “comprehensive resolution mechanism that can clean up the mess in the real estate sector, stabilize the financial system, and help put the economy back on the growth path”. A variety of models to price the impaired asset including hedonistic for real estate, and standard gravity models for transportation assets for takeover and re-auction were outlined. For electricity generation, “the eroded value could set the takeover value, while the price could be determined by an auction now under a policy that allows fuel prices ….as pass-thru”.
 
10
In this regard, India is ‘ahead’ of China. In China, GST embraces only goods production and services taxes are left to provincial governments, and there is no cross vatting between the two. But the economic distortions continue more rampantly in India since the disparate rates across goods and services are based less on economic logic (elasticity, non-distortion) and more on public perceptions of what should and should not be taxed. Moreover, the GST has veered somewhat closer to the revenue neutral rate of the states which were production oriented.
 
11
The major reform in going over to GST, was that the tax rates are uniform across the country, and the value added principle (taxes on inputs being reimbursed to the producing entity) is complete –being now across both goods and services. Service taxes had been placed on value added basis from 2007 onwards. The GST rate is split into two equal rates. One for the central kitty and the other the states. When goods and services move from one state to another, the state which collected the taxes (on intermediate goods or on the good when sold to a dealer), has to cough up the same to compensate the state where the final good or service sales takes place. This is a destination-based tax, and has to be distinguished from zero vatting which takes place in international exports. Therein, the exporting country strips the good and service of all taxes. Here, the exporting state collects but gives the taxes to the state where the consumption takes place; in effect. All states have the same taxes, so that a dysfunctional tax-based incentives to attract investments becomes difficult. The states together collect 50% of the merged GST. Being a destination oriented tax the producing states stand to lose much, while the consumption states gain. The fiscal incentive to attract investments and production activities is also much reduced, for the regional governments, which does not bode well for an economy which is still to make its economic transition. Locational tournaments between regions have been an important facet of the high investments that make for the transition in large countries such as China, Canada, and the US. But now with GST being a done deed, the answer to overcoming this disincentive to attract investment, does not lie in moving away from it or in distorting the same, but in increasing the weight for local value addition and investments in the devolution of funds from the Center. Perhaps as much as 40% of that collected by the Centercenter ought to be devolved on the capital formation aspect. See Chap. 11 in this book for a discussion and estimation of the RNR at the state level.
 
12
Morris et al. (2019) point out that in its current form, without the Finance Commission making an upfront allocation of some 40% of the central GST collections on the basis of production/ gross capital formation in tradable goods and services production, i.e., without giving due weight for origination, the fiscal incentives to engage in locational tournaments would fall substantially, at too early a stage in the country’s economic transition, reducing the probability of success. The report also brought out the vastly different revenue neutral rate of taxation (RNRs) as between the “producing” states and the consuming states, much higher than what had been estimated by the NIPFP. See Rao and Chakraborty (2013).
 
13
Morris et al. (2018).
 
14
There have been no studies which have looked at the GST rates, especially those in the high brackets of 18 and 28% from the point of view of revenue maximization, which would have meant working out the medium- to longer term price and income elasticities of demand. There is the distinct possibility that many of the rates are well above the revenue maximization rates so that with reduction in the rates, the revenues could actually go up. This is probably the case with automobiles in the 28% GST bracket. Railways have been operating at well above “revenue maximizing tariffs” for decades now, throwing freight on to the roads which brings about massive (and entirely avoidable) vehicular pollution. The same is true for electricity, especially for industrial, commercial, and top bracket household consumers. See Pandey and Morris (2017).
 
15
In the response to the COVID-19 Crisis, the singular unwillingness of the government to cut tax rates in sharp contrast to the quick response during the GFC, is notable. The outside lag for tax cuts/increases which are known to be small is now therefore, makes it an important policy instrument in demand management.
 
16
The author could not understand why such behavior had gone on for long without the senior Central Board of Direct Taxes (CBDT) officers putting up a defense to make the target determination more scientific. The problem seemed to have nothing to do with the party in power. The lack of institutional investment in government organizations meant that the CDBT had never thought of a model, based on expected inflation and growth to get at working estimates. Clearly in the Indian context, power overrides information or knowledge, leaving experts and autonomous organizations very vulnerable. And finance ministers would push for ambitious targets, with vigor since in the popular discussion, there is so much tax evasion! While admitting that such a model would have helped not only to get a reference for the overall target but also to fix the regional targets ‘scientifically’, and would have great value generally, the CBDT officers nevertheless felt powerless since all of them were firefighting and were always dealing with some high-profile case or the other! (Anonymous CBDT officers in private conversation with the author).
 
17
Ex ante, it would have been even higher, given the high multiplier effect of public investment spending in India (Bose and Bhanumurthy, 2015).
 
Literature
Dholakia, R. (2018). Issues in measurement of inflation targeting. Economic and Political Weekly, LIII(45).
Joshi, H., & Mukherjee, S. (2017). Transitions in currency denomination structure as supply disruption and demand distortion: Efficiency, effectiveness and bullwhip, W.P. No. 2017-05-02, May. Indian Institute of Management Ahmedabad.
Kumar, R., & Soumya, A. (2010). Fiscal Issues for India after the Global Financial Crisis, ADBI WP No. 249, September. Asian bank development institute.
Kumar, R., Joseph, M., Alex, D., Vashisht, P., & Banerjee, B. (2009). India’s economic outlook 2008–09 and 2009–10, Working Paper no. 234. Indian Council for Research on International Economic Relations (ICREIR).
Morris, S. (2019). Steering the macroeconomy with a broken compass and stuck rudder, WP No. 2019-09-02, September, Indian Institute of Management.
Mundle, S., Govind Rao, M., & Bhanumurthy, N. R. (2011). Stimulus, recovery and exit policy- G20 experience and Indian strategy. Working Paper no. 2011–85, March 2011. National Institute of Public Finance and Policy.
Nagaraj, R. (2013). India’s dream run, 2003–08—Understanding the boom and its aftermath. Economic and Political Weekly, 48(20).
Pandey, A., & Morris, S. (2017). Tariff and related matters: Surplus energy scenario in Punjab—A report to the Punjab State electricity regulatory Commission, April 21. Indian Institute of Management Ahmedabad.
Rao, K., & Chakraborty, P. (2013). Revenue implications of GST and estimation of revenue neutral rate: A state-wise analysis. National Institute of Public Finance and Policy.
RBI. (2015). Monetary policy report—April. Reserve Bank of India.
Metadata
Title
Policy and Analyses
Author
Sebastian Morris
Copyright Year
2022
Publisher
Springer Nature Singapore
Book
Macroeconomic Policy in India Since the Global Financial Crisis

Print ISBN: 978-981-19-1275-7

Electronic ISBN: 978-981-19-1276-4

Copyright Year: 2022

DOI
https://doi.org/10.1007/978-981-19-1276-4_6