India’s economic status has been showing signs of a significant deceleration in demand throughout its urban and rural areas. This has imparted a notable impact on various sectors such as the automotive industry, which is experiencing a prolonged slump, leading to major job cuts. In response to this downturn, the government has prepared a plan entailing a stimulus package to help turn the tide.
The Underlying Causes for India’s Economic Deceleration
India’s merchandise exports have taken a hit due to the ongoing trade war between powerhouse nations US and China. This, in conjunction with poor sentiments within equity markets and banking institutions, has stalled investment in India. With domestic economic activity remaining weak while global slowdowns and trade tensions intensify, there are prospects of further exacerbation of this slowdown. Consequently, industry players are advocating for a stimulus package of ₹1 trillion to kick-start an investment cycle amidst this global and domestic sluggishness.
The Government’s Stance on the Economic Slowdown
The government is acknowledging that a strict fiscal policy is doing more harm than good, and monetary policy alone is insufficient to stimulate economic growth. In response to this, they have developed a suite of measures comprising tax cuts and targeted sops geared towards reversing the economic dip.
Proposed Measures to Combat Economic Downturn
The government’s proposed measures to energize the economy entail a robust stimulus package set to include Rs 100 trillion worth of infrastructure investment over the next five years. Furthermore, relief from Goods and Services Tax (GST) to certain sectors, for example, the struggling automotive sector, aims to boost demand. Other initiatives designed to cut through red tape impeding cross-border trade and enhancing the ease of doing business are also in the offing. Committed to bolstering exports, the government is working on a new World Trade Organization-compliant duty reimbursement scheme as well.
Significance of Proposed Measures and the Role of FRBM Act
Previously, the Fiscal Responsibility and Budget Management (FRBM) Act restricted the government’s ability to provide a fiscal push in the Union budget. The government is currently mulling over the use of an ‘escape clause’ within the FRBM Act that allows for deviation in the fiscal deficit up to 50 basis points. This could potentially free up an additional ₹1.15 trillion for expenditure in the current fiscal year.
Understanding the Escape Clause and its Implications
The N.K. Singh-led panel tasked with reviewing the FRBM Act had proposed an escape clause. This allows deviations up to 0.5 percentage points of Gross Domestic Product under specific triggers such as drastic structural reforms in the economy with unforeseen fiscal implications, acts of war, and farm distress.
Table of Key Facts
| Key Fact | Description |
|---|---|
| Stimulus Package | ₹1 trillion |
| Infrastructure Investment | Rs 100 trillion over the next five years |
| Tax Relief | Goods and services tax (GST) relief, specific sectors including automobile |
| Additional Expenditure | Potential of ₹1.15 trillion through an escape clause |
| Escape Clause Deviation | 0.5 percentage points of Gross Domestic Product |
Source of Information
This informative piece derives its data from Mint.