A couple of days before she presents her first Budget as finance minister, Nirmala Sitharaman has been confronted by a litany of bad news. One, car sales have dropped 17% YoY; bike sales have slumped 11% in the same time. This shows low consumer confidence and a sharp attenuation of retail credit from lenders. Two, June manufacturing growth has slowed, though not shrunk, according to Nikkei’s Purchasing Managers’ Index (PMI). Orders, output and employment growth have softened. There just doesn’t seem to be enough demand to support robust growth. The Indian consumer is insecure about the immediate economic future, opportunities and jobs, and has become tightfisted. The only way to ease these fears would be through sharp tax cuts, for which there is no fiscal elbow room. Employment boosts can’t be delivered in a single Budget.
If consumers are scared, animal spirits of industry and services have evaporated. Mumbai-based Centre for Monitoring Indian Economy (CMIE), which tracks the progress of individual investment projects, finds that the percentage of actual project starts is at a 15-year low. This is bad news. Reluctance to invest implies lack of confidence over a longer period in future. Given that, it is unsurprising that the borrowings of NBFCs, which grew nearly 30% YoY in 2008-09, have shrivelled to under-5% now.

Here, the Budget can play a positive role — by injecting measures to boost confidence into businesses big and small. It can, for example, rein in tax hounds, cut red tape and help companies expand into areas like farm-based industry. Lenders should be encouraged to lend. Sure, once upon a time, banks played fast and loose with public money with crony capitalists, and have been caught out. That does not mean they revert to the other extreme — not lending at all. FM should consider the idea of GoI issuing bonds to get bad loans off the banks’ books, and make banks happy to lend again. Once bank market valuations rise as lending and growth revive, GoI can recoup the cost of bonds by selling bank shares. A credit drought, much like the climatic one, can be destructive.
This piece appeared as an editorial opinion in the print edition of The Economic Times.
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