Answer to Question #156987 in Macroeconomics for EMMANUEL DOKYI

Question

evaluate the impact of government policies on a named economy you have chosen, in a period of time you have specified.

Answer 1

Impact of government policies on the Indian economy in 2019:

Corporation tax rate cut

In the biggest corporation tax reduction in 28 years, the government slashed rates by up to 10 percentage points — effectively a Rs 1.45-trillion tax break — in a bid to revive the economy. With this, the government aims to attract investment and create jobs. The Ministry of Finance reduced, through an ordinance, the corporation tax rate from 30 per cent to 22 per cent, and to 15 per cent for new manufacturing companies. The rate reduction, a long-standing industry demand, was seen as one of the many reliefs for key sectors, including automobile and fast-moving consumer goods (FMCG).

Rs 25,000-crore real estate fund

The government approved a Rs 25,000-crore fund for the real estate sector, in a move that should aid the completion of over 1,600 stalled housing projects. With this, the government aims to boost growth by steering consumption in real estate and associated sectors. The move is likely to help 459,000 housing units across the country. Announcing the move, Finance Minister Nirmala Sitharaman said this Alternative Investment Fund (AIF) would comprise Rs 10,000 crore coming from the government and the remaining provided by LIC and SBI.

Bank recapitalisation

In August, the government decided on an upfront capital infusion of Rs 70,000 crore into public-sector banks, to boost lending and improve the liquidity situation. The highest infusion, of Rs 16,000 crore, was for Punjab National Bank (PNB), followed by Union Bank of India (Rs 11,700 crore). According to FM Sitharaman, the move was expected to generate additional lending and liquidity to the tune of Rs 5 trillion in the financial system.

Changes to FDI rules

The government allowed 100 per cent foreign investment in coal mining and contract manufacturing. It eased sourcing norms for single-brand retailers and approved 26 per cent foreign investment in digital media. "The changes in the FDI policy will make India a more attractive FDI destination, leading to increased investments, employment, and growth," the government said.

The PM-KISAN scheme

Before the Lok Sabha elections, the Narendra Modi-led government launched the Pradhan Mantri Kisan Samman Nidhi Yojana (PM-KISAN), under which the government provides Rs 6,000 annually (in three equal instalments) to 140 million farmers. As of December 2019, around Rs 36,000 crore had been disbursed to beneficiaries, according to reports. The amount is directly transferred to the bank accounts of beneficiaries.

Merger of banks

Indian lenders are saddled with some of the world’s worst bad-loan ratios. To revitalise the banking sector, the Centre in September said it would merge public-sector banks and reduce their number from 27 to 12 over the next few years. The government decided to merge 10 PSBs into four entities. Three banks — PNB, OBC and United Bank of India — will combine to form India's second-largest lender. Canara Bank and Syndicate Bank will merge to form the fourth-largest PSB, and Union Bank of India will merge with Andhra Bank and Corporation Bank to create India's fifth-largest PSB. Additionally, Indian Bank will merge with Allahabad Bank to make the seventh-largest PSB.

Privatisation of CPSEs

The government initiated the process to privatise a number of Central Public Enterprises (CPSEs), including Air India. It set an all-time high disinvestment target of Rs 1.05 trillion, up from Rs 90,000 crore projected in the Interim Budget 2019-20. The divestment processes include a sale of the government's 53.2 per cent stake in BPCL, 63.7 per cent in Shipping Corporation of India and 30.8 per cent in CCI, to a strategic buyer.

Angel tax exemption

Amid a depressed market sentiment, Sitharaman exempted all eligible start-ups and their investors from “angel tax” in August. Besides, a dedicated cell under a member of the CBDT was also set up for addressing the problems of start-ups. The “angel tax” had been introduced as an anti-abuse measure for tax evaders in 2012.

Removal of income-tax surcharge on FPIs

To ease the concerns of foreign portfolio investors (FPIs) over an increase in surcharge announced in the Union Budget, the finance ministry was considering “grandfathering” the income earned by them up to the Budget (July), a ministry official said. In Budget 2019, the government had proposed a hike in surcharge for the super-rich (non-corporate) from 15 per cent to 25 per cent for incomes between Rs 2 crore and Rs 5 crore, and from 15 per cent to 37 per cent for higher incomes. This spooked the stock markets to the extent that the government had to roll back its decision. To ease the concerns of foreign portfolio investors (FPIs) and domestic portfolio investors over the increased surcharge, the government in August announced individuals and Hindu Undivided Families (HUFs) would not have to pay an enhanced surcharge on capital gains tax arising from the sale of equity shares and units of equity-oriented mutual funds.

Amendments to the IBC

The government made major changes to the Insolvency and Bankruptcy Code (IBC). The amendments to the law would enforce a strict 330-day timeline for the insolvency resolution process, including any legal challenges, and uphold secured creditors’ priority right on the sale or liquidation proceeds of bankrupt companies. The changes are aimed to speed up the bankruptcy resolution process, which is often mired in litigation.

The Supreme Court’s AGR ruling

Telecom firms reported record losses for the quarter ended September 2019 after making provisions for the Supreme Court’s ruling on the definition of adjusted gross revenue (AGR). The SC ruling requires private telecom service providers to pay out higher sums towards licence fee and spectrum usage fee, which are dependent on the value of AGR. The telecom operators’ liabilities towards the said charges, including interest and penalties, is estimated at a whopping Rs 1.3 trillion. The SC order came as a major blow to the two incumbent operators — Vodafone India and Bharti Airtel — and also forced them to hike tariffs.