#dnaEdit: Economic blues

The Bombay Stock Exchange’s Sensex, the 30 blue chip share index, has dropped below the euphoric high of 28000, underlining prevailing anxieties about the state of the economy. It can be reasonably argued that the concerns as reflected in the Sensex dip are not imaginary in themselves. With the sole exception of Reliance Industries, corporate earnings have plummeted. Add to this the negative market sentiment stemming from the government’s latest move to bring in over Rs40,000 crore in capital gains tax from the foreign institutional investors (FIIs); and service tax to a tune of around Rs400 crore from the foreign banks operating in the country.

International crude oil prices have begun to slowly move up, and the advantage that the economy enjoyed in terms of savings on foreign exchange due to lower prices, is likely to taper off. There is more bad news from abroad: China is slowing down to seven per cent growth rate and Greece is quitting the European Union (EU). Movement at the stock exchange — though not really an accurate barometer of the state of the economy — does reflect the so-called market sentiment, which is considered crucial in attracting investments in general — and foreign investments in particular.  

This should be a matter of concern for the BJP-led NDA government of Prime Minister Narendra Modi, which came into office last May with the determination to turn the economy around; to make India a business-friendly destination. The change is not likely to happen as fast as the government would like it to be — nor in the manner Indian and foreign businesses expect it to be. The assumption on the part of business has been that tax rates will be rationalised as well as pruned. In the past, Arun Jaitley — now the Union finance minister — had promised that a government led by his party would provide a stable tax regime. Other BJP leaders — now part of the present government — had unequivocally declared their intention to end the tax terrorism supposedly practised by the previous UPA government. But now the finance ministry seems to have veered around to the view that legitimate tax demands should not be given up by the government. In fact, recently Jaitley said that India should not be mistaken for a tax haven. And that the government will not waive the tax due to it. 

But then taxation is not the sole woe plaguing the government. Declining corporate earnings indicate that economic activity is not picking up in earnest. The factors behind the sluggish economy though still remain unclear. The argument that the land acquisition bill — now caught up in a fierce political contest within and outside Parliament — is dampening market sentiment does not ring entirely true. Government argues that the stalled land legislation bill is holding up infrastructure projects. But such a single-point argument can hardly explain why more and more new economic ventures are not taking off. 

The deeper problem seems to be one of not generating enough demand at the domestic as well as global levels. First the global scenario: A weak external economy has hurt the Chinese economy with exports tumbling and the property market as well as domestic consumption slowing down. North America is yet to get back to the pre-meltdown crisis level. At home, the government is keen on pushing up exports and improving its dollar earnings. But that’s not likely to happen for some time because of the prevailing state of affairs in Europe and in America. That many Special Economic Zones (SEZs) with their focus on tax incentives/holidays and exports continue to lie idle should then not come as a surprise. True, the government cannot be the only one to be held responsible for the economy not picking up a faster pace. At the same time, the government does need to seriously consider innovative ways to accelerate the growth of economic activity in the country.