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Banking crisis, GDP rate drops, liquidity crunches, higher interest rates on personal loans, and lower demand for FMCG goods – these signs all point in one direction. India’s economic slowdown is here. To kickstart economic revival and get the country’s fiscal circulation back on track, there’s no one-stop solution. It requires a variety of strategies that need to be implemented simultaneously. Here’s how India can take on the slowdown.
Transfer of repo rate cut benefits
The repo rate is the rate at which the Reserve Bank of India lends money to commercial banks. This rate helps to either reduce or increase the supply of money in the economy and is used to control inflation. A decrease in the repo rate effectively reduces the cost of borrowing for commercial banks, as it would lower the interest charged on their borrowings.
The repo rate has a strong impact on a commercial bank’s lending rate as any reduction in the cost of borrowing ultimately gets passed down to the end consumer via lower interest rates on personal loans and housing loans. By reducing the repo rate, the RBI can initiate economic revival as this move can increase the level of disposable income in the hands of the consumer. This will in turn increase the purchasing power and boost public consumption.
Most recently, the RBI, in its bi-monthly monetary policy meet on the 4th of October, 2019, slashed the repo rate for the fifth consecutive time with the aim to increase consumption and mitigate economic slowdown. Due to this move, the repo rate now stands at 5.15%, down by 25 basis points from the previous rate of 5.40%.
If the benefits of this rate cut make its way to the user, you’ll find that borrowing gets easier. You can then avail home loans or personal loans from marketplaces like Finserv MARKETS at more competitive rates. Currently, the interest rate for personal loans on Finserv MARKETS starts from as low as 12.99%. With the transfer of repo rate cut benefits, it could go down further.
Monetization of assets
Asset monetization is a relatively simple and quick solution that can be used by the government to help with economic revival. This solution basically entails selling the land, building, operational assets, or infrastructure of state-run companies. The government can then utilize the funds received from monetizing such assets for funding new infrastructure projects, which can subsequently help boost the economy.
Alternatively, the funds from monetized assets can also be used to compensate the government for any revenue loss that it may have to bear due to economic policies like tax rate cuts.
The Indian government’s policy think tank, NITI Aayog, has identified several key assets across various sectors, such as the aviation sector, the power sector, the shipping and transportation sector, the national highways, and the railways. NITI Aayog is planning to monetize these assets to raise around Rs. 90,000 crore in the current financial year.
Source: economictimes.indiatimes.com
Transfer of repo rate cut benefits
The repo rate is the rate at which the Reserve Bank of India lends money to commercial banks. This rate helps to either reduce or increase the supply of money in the economy and is used to control inflation. A decrease in the repo rate effectively reduces the cost of borrowing for commercial banks, as it would lower the interest charged on their borrowings.
The repo rate has a strong impact on a commercial bank’s lending rate as any reduction in the cost of borrowing ultimately gets passed down to the end consumer via lower interest rates on personal loans and housing loans. By reducing the repo rate, the RBI can initiate economic revival as this move can increase the level of disposable income in the hands of the consumer. This will in turn increase the purchasing power and boost public consumption.
Most recently, the RBI, in its bi-monthly monetary policy meet on the 4th of October, 2019, slashed the repo rate for the fifth consecutive time with the aim to increase consumption and mitigate economic slowdown. Due to this move, the repo rate now stands at 5.15%, down by 25 basis points from the previous rate of 5.40%.
If the benefits of this rate cut make its way to the user, you’ll find that borrowing gets easier. You can then avail home loans or personal loans from marketplaces like Finserv MARKETS at more competitive rates. Currently, the interest rate for personal loans on Finserv MARKETS starts from as low as 12.99%. With the transfer of repo rate cut benefits, it could go down further.
Income tax reforms
Reforming the tax laws is a medium to long-term solution for taking on the economic slowdown. However, it can be very effective at quickly boosting consumption levels and increasing tax revenue collection.
Implementation of the Direct Tax Code (DTC), which is a streamlined consolidation of all the direct taxes, can bring about an equitable and effective direct tax system. Thanks to its efficiency, it can also enable and increase voluntary tax compliance, which can lead to a multi-fold upsurge in the tax revenue.
Source: economictimes.indiatimes.com
Additionally, the government can also look into income tax reliefs for individual taxpayers. Apart from merely increasing the exemption limit, the government could also look into slashing the income tax rate from 20% to 10% for taxpayers within the Rs. 5 lakh to Rs. 10 lakh slab. This would drastically increase the demand and consumption levels in the economy as people would then be left with more cash in hand, prompting them to make more purchases.
In the meantime, while the country awaits personal income tax reforms, you could invest in ULIPs available on Finserv MARKETS to avail more deductions under the Income Tax Act. Finserv MARKETS offers three types of ULIP plans, namely child plan, retirement plan, and investment plan. Take a look at the benefits under each category and choose the one that best meets your financial goals.
Strategic divestment plans
Strategic divestment is another powerful tool that can be used by the government to reduce the fiscal deficit and bring the economy back on track. Strategic divestment involves reducing the government’s stake in public sector companies by selling equity to domestic or foreign private players. Similar to asset monetization, the funds received from divestment can be used to make up for revenue losses due to tax benefits and reductions offered to corporates. This way, strategic divestment can indirectly help tackle the economic slowdown.
In the current financial year, the government of India had divested a part of its equity stake in Rail Vikas Nigam Ltd. which is a Central Public Sector Enterprise (CPSE), via an Initial Public Offer (IPO). This stake sale brought in around INR 475.89 crore, with the government retaining around 87.88% of equity post the divestment.
The takeaway:
The key to taking on the slowdown is to boost demand and increase the purchasing power of the people. Measures like corporate tax rate cuts and repo rate cuts can only prove to be effective if the benefits of these strategies actually trickle down to the common man. Only by implementing measures to directly make buying easier can the country’s demand go back up, aligning the system back in the direction of economic revival.
For instance, if commercial banks decide not to reduce their lending rates by much, it would continue to be burdensome for borrowers. People who intend to avail personal loans or home loans, available on Finserv MARKETS, would benefit more if the repo rate cuts translated to the grassroot level. Lower interest rates, when combined with other features like zero collateral requirements, instant personal loans, and transparent dealings make Finserv MARKETS one of the best places to head to if you want to avail a loan.
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