What Could Stimulate Demand? – Krishnan L, IFMR GSB

The World Bank on Monday projected India’s economy to contract 3.2% in FY21. But a month ago IMF predicted that India will be growing around 7.4% in FT21. In a recent press conference, RBI Governor also said that the current crisis is severe than expected. It is deep-rooted and it might take years to come out of the crisis. It is actually difficult to stimulate the economy because there is a huge fall in demand. There are issues in the supply chain network, production line, and availability of laborers but labor issues can be resolved if the government is coming with a plan to bring back migrant workers and the supply chain network will be automatically restored after the lockdown. But do we have demands for goods and services? The revival o countries demand is going to be more challenging than supply. During the lockdown, most people spent their savings, so there is significant erosion in their wealth.

Even if we put money in the hands of a common man he might save instead of spending because of the current uncertainty. For a speedy recovery Increase in government spending alone can’t help. Consumers should get the confidence to spend instead of saving. To bring this change we need to give confidence to consumers about future cash flows. The change should start from the mind of the consumer. We need to give hope and confidence to both investors and consumers by creating a positive Eco-system. This can be done by major policy changes and bringing new investments to the county.

Is it logical to expect investment during the recession?

It is true that we can’t expect fresh investments at this moment but we can target companies which are looking for opportunities to relocate their production line from China for various reasons. Already few companies moved from China during the Trade war. Few companies are looking to move from China because of the increasing production cost. Lots of companies faced supply chain issues during the pandemic. Those companies are now trying to diversify their manufacturing setup to de-risk themselves. Countries like Japan (loans of about 2 billion and aids of about 23.5 billion), US (50% tax cut), UK, Australia, Taiwan also started announcing aids, tax cuts, and incentives for the companies which are move out of China. These countries are offering incentives not only to help companies to come out from China but also to attract those investments to their own soil.

Round 1

The Result of the trade war between the US and China led to an increase in the price of the products manufactured in China. Lots of manufacturing companies moved from China to other countries to de-risk them self. Nomura, a Japanese financial group found in a study that out of 56 companies moved from China April 2018 to August 2019, 26 moved to Vietnam, 11 moved to Taiwan, 8 moved to Thailand, 6 moved to Mexico and only 3 came to India. Despite being a developing country with huge manpower, India could not attract those companies. We gave away huge opportunities in the round 1, a year ago. This is a clear indication that we are not the only county in the race. There are other small countries trying to grab the investments moving from China.

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Why we could not grab it?

There are a number of reasons, But most importantly judicially being unpredictable and uncertain, unstable laws and corruption these constraints created a potential risk for the investor’s investment. The recent issue of Capital “Amaravati” is a clear example that how an investor’s funds can get into risk because of the political uncertainties. Because of these uncertainties foreign investors are not willing to consider India despite having huge potential.

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Can we grab round 2?

At these desperate times we India must attract companies moving out of China. India learnt a lesson from the past and trying to address the major problems in doing business. The Indian government has announced Productivity based incentives for Large Scale Electronics Manufacturing offers a production linked incentive to boost domestic manufacturing and attract large investments in mobile phone manufacturing and specified electronic components, including Assembly, Testing, Marking, and Packaging units. The Scheme would tremendously boost electronics manufacturing and establish India at the global level in the electronics sector. The government is also considering expanding this scheme to other sectors. We also have reduced the Tax to 15% which is the lowest in the south Asian region for the Companies who want to set new manufacturing setups in India. India also started working on land bank So that the lands to set up new factories are readily available to speed up the process.

Rising NPAs

New foreign investments can give a boost to a certain extent. It is also essential to pay attention to the companies which are already working in India. The quick revival of these companies from lockdown can give a positive signal to new investments. The government had announced 3 lakh crores loans to MSMEs for around 45 lakhs of companies, but this covers only the companies which already took loans from the bank. The companies which have not taken any loans in the past and now trying to get fresh loans cannot get the benefits of this scheme and they will be forced to submit collateral and guarantees.  

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Though MPC reduced the interest rate drastically in the last one year the final benefits of lower interest rates have not transferred to the common man completely. Banks are not reducing the interest rates in the same ratio and they are not ready to give fresh loans. Rising NPAs in the banking system became a big barrier for fresh loans. Moreover because of the prolonged lockdown NPAs in the system is expected to rise further. It’s a time to consider the idea of “bad bank” so that the bank’s balance sheet can be cleaned to offer fresh loans by doing this All the NPA’s can be transferred to one bank and those NPAs can be managed through experts instead of having it everyone’s balance sheet. RBI should also consider some sort of benchmarking to transfer the net benefits of lower interest rates to the common man as soon as possible. It’s a time for RBI to come up with a solution to transfer the benefits to pull bank economy from the recession 

Loan restructuring

RBI announced loan moratorium till august 31st. Once the lockdown is lifted, if companies start running from July, still it will be very difficult to generate positive cash flows. So RBI should consider complete restructure of loans and the moratorium period can be extended till April 2021 or at least till December 2020. 

To hold the investments and attract more in the future we need to address several weaknesses, like low productivity due to outdated technologies, lack of an ecosystem of efficient suppliers who could manufacture quality goods at the required speed in large volumes and logistical and infrastructural constraints. Because in round 1we had only small developing economies in the race but now developed big economies are also in the race to attract investments.

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