RSTV: INDIA’S WORLD- NIRMALA SITHARAMAN AT IMF
Introduction:
Union Finance Minister Nirmala Sitharaman’s visit to US and especially her meetings at the IMF and the World Bank where she gave a call for action to reduce the disruption in the economies around the world and exploring opportunities in the current scenario. She also stressed on new avenues in India after the historic move of slashing the corporate tax last month which is seen by the industry a big move to boost the economy.
Highlights:
- Finance Minister mentioned that trade wars and protectionism have generated uncertainties that will ultimately impact flow of capital, goods and services.
- She called for ‘concerted action’ to mitigate the disruption on account of synchronous slowdown and to invoke the spirit of multilateralism for global growth.
- She further said that the increased trade integration, geopolitical uncertainties, and high accumulated debt levels necessitate strong global coordination and that we need not wait for the slowdown to become a crisis.
- The IMFC Introductory Session was focused on Global Developments and Prospects and the discussions centred on the World Economic Outlook released on October 15, 2019.
- The Early Warning Exercise discussed upcoming risks to global economy and stability.
- Finance Minister Smt. Nirmala Sitharaman also led the Indian delegation to the G20 Finance Ministers and Central Bank Governors meeting in which the deliberations centred on international taxation and Stable coins.
- The Ministers and Governors also took updates from the G20 Deputies on Quality Infrastructure Investment, Debt Sustainability, Financing for Universal Health Care and Building Effective Country Platforms, and from the Africa Advisory Group on the Compact with Africa (CwA) initiative.
- On the discussions at the session regarding the work underway on developing a consensus solution on tax challenges arising from digitalization, the Finance Minister stated that a unified approach to the nexus and profit allocation challenges is a promising one that merits serious attention. A solution that is simple to implement, simple to administer and simple to comply with is needed.
- Addressing the annual meeting of the International Monetary Fund (IMF) here, Sitharaman said a task force has been constituted in the finance ministry that will draw up a national infrastructure pipeline for the next five years.
- “As we envisage becoming a five trillion-dollar economy by 2024-25, our focus on creating world-class infrastructure has become even more resolute. If we spent USD 1.1 trillion on infrastructure in the last 10 years (2008-17), we now are going to invest about USD 1.4 trillion in the next five years,” she said.
- She highlighted various steps to enhance infrastructure investment by launching innovative financial vehicles such as Infrastructure Debt Funds (IDFs), Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs) and laying down a framework for municipal bonds.
US- China trade dispute presents opportunity for India:
- Diminished US-China trade engagement could have positive results for countries such as Brazil and India from a trade perspective, at least in the short run.
- For instance in the case of soybean there could be a cascading impact in terms of openings for India to enter other markets
- US-China trade war could accelerate the transition. US companies that rely heavily on imports from China would be forced to redesign their supply chains around tariffs.
- Multinationals and their suppliers would look for alternative facilities outside China. This is bad news for China but might benefit India.
- Even if tariff walls went up, India’s large market and relatively swift growth would force multinationals who wanted a piece of that growth to manufacture locally.
- India would receive a large boost from a China on the hunt for new supply chains.
- If China goes ahead with its proposal to slap a 25 per cent tariff on polyethylene and liquid propane, which were among 106 American goods targeted, buyers in the Asian nation may look elsewhere for alternatives to pricier US supplies. And the energy-rich Middle East with plenty of petrochemical supplies looks well-suited to meet the substitution requirements.
Reasons for global slowdown:
- Trade war between the United States and China.
- Trade growth had fallen from 5% in 2017 into negative territory now.
- Uncertainty over government policies. In the UK, persistent uncertainty about the timing and nature of its exit from the European.
- Germany’s economy had shrunk in the second and third quarters with a slump in car manufacturing.
- The global order that regulated trade is gone and we are in a new era of less certain, more bilateral and sometimes assertive trade relations.
- China’s growth rate is the slowest in years.
- India, formerly the fastest growing economy in the world, had its manufacturing sector grow +0.6%, and auto sales are down 41% from year ago levels.
Why is Indian economy slowing down?
- The demand for passenger vehicles slowed down during the second half (beginning September 2018) of this financial year because of many reasons — high interest rates, higher fuel prices and lack of credit. However, many in the industry say consumers have only postponed the decision to purchase vehicles, suggesting that there is no permanent destruction of this demand.
- At a very broad level, demonetisation — a radical policy decision — and introduction of Goods and Services Tax — a structural reform — naturally had an adverse impact on the economy.
- Over the last two years, bank credit slowed down dramatically because banks had to make higher provisions for bad loans. With six public sector banks under the central bank’s prompt corrective action framework, and some others voluntarily having pressed the pause button on lending, retail and businesses found it quite difficult to access credit.
- Poor bank credit, liquidity crisis and high interest rates all created a huge drag on the economy.
Positives of Corporate Tax rate Cut:
- The cut in tax rates would boost business and investor sentiment and confidence.
- It will make India’s corporate tax rate competitive with that of Asian neighbours.
- It will boost corporate incomes.
- India will become more globally competitive, inducing more domestic and foreign investment and boosting exports.
- Markets responded with a huge surge in stock prices.
- The new tax rate will boost dividends and, hence, boost the Government’s collections of dividend distribution tax (DDT) and income tax.
- Public sector enterprises and government-owned banks may register stronger profits, and likely pass on higher-than-budgeted dividend to the Centre.
- Companies could pump the excess cash back into their businesses, adding employees, going in for expansions, building new facilities and so on.
- There would also be higher foreign inflows into equities and outflows from the debt segment.
Way Forward:
- The demand side has to be addressed.
- Interventions that put more money in consumers’ hands, through tax cuts and the creation of more jobs.
- Need to focus on improving the climate for investment.
- Renew investment in infrastructure.
- Effectiveness of monetary policy could be enhanced.
- Stronger fiscal policies to boost demand.
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