When Nirmala Sitharaman took office as India’s finance minister in May 2019, India’s growth was being held back by slowing domestic demand and private investment. The country’s GDP has fallen in consecutive quarters since the third quarter of 2016-17. The arrival of the Covid-19 pandemic has only compounded India’s woes as the country entered strict lockdown from March 25, 2020. India has seen two successive quarters of growth negative in GDP, with FY21 ending with a contraction in growth of 7.3%. India’s health infrastructure was overstretched and millions of Indians employed in its informal economy faced a livelihood crisis. The FM was in an unenviable position. Governments around the world were loosening their purse strings to get money into people’s hands. Sitharaman was also expected to give a direct boost to the economy. His team, however, chose a different, multi-pronged strategy – several relief programs for the weakest sections of society; help businesses, especially smaller ones, sustain themselves through the crisis; and focus strongly on infrastructure development to create jobs.
To this end, Prime Minister Narendra Modi announced a stimulus package of Rs 20 lakh crore in May 2020. Part of the Aatmanirbhar Bharat Abhiyan, he gave tax breaks to small businesses, a package of Rs 1.7 lakh crore for free food grains to the poor and cash to poor women and the elderly, and a focus on infrastructure spending. The government has launched an emergency line of credit guarantee program in addition to the Credit Guarantee Trust to provide additional credit to MSMEs (micro, small and medium enterprises). The program has now been extended until March 2023. What Sitharaman did not give in to was pressure from MSMEs to forego loans. The ambitious National Infrastructure Pipeline, initially announced in 2019, has been given a boost, comprising 9,335 projects and envisioning an investment of Rs 108 lakh crore between 2019-20 and 2024-25. As part of its Make in India initiative, the Center also announced production-related incentive programs targeting 13 key manufacturing sectors.
In August 2021, the Center announced an aggressive divestment and asset monetization campaign aimed at raising Rs 6 lakh crore. A new public sector enterprise (PSE) policy was announced as part of the Aatmanirbhar package to privatize PSEs, except those in four strategic sectors. Air India was eventually sold to Tata Group and Life Insurance Corporation launched its initial public offering to raise Rs 21,000 crore.
“Without spending any money, it gave confidence to the economy and achieved the same goal,” says Nilesh Shah, MD, Kotak Mahindra Asset Management. Bank credit to micro and small enterprises (MSEs) in February 2022 jumped by 8.4% to Rs 13.12 lakh crore from Rs 12.11 lakh crore in February 2021, indicating minimal impact on business and trade. The economy rebounded from its steep fall, rebounding to 8.5% growth in the second quarter of FY22. However, since growth came off the weak base of the previous year, the reality has very quickly hit. Growth slowed to 5.4% in the third quarter and is expected to fall to 3.2% in the fourth quarter, according to rating agency ICRA estimates.
FM’s troubles are also unlikely to end anytime soon. The ongoing war in Ukraine and the resulting supply chain disruption, soaring prices for crude oil and food items like wheat have triggered inflationary impulses across the globe. Inflation in India exceeded the RBI’s upper 6% target for four consecutive months until April, when consumer price inflation hovered at 7.8%. The RBI, which had kept interest rates low during the pandemic, was forced to raise them by 40 basis points in May, and another hike is imminent in June. On May 21, Sitharaman announced a series of measures to calm inflation, which included a reduction in excise duty on petrol by Rs 8 per liter and on diesel by Rs 6 (resulting in a loss of Rs 1 lakh crore for the Treasury), a reduction in customs duties on raw materials for plastics and steel, and an increase in export duties on iron ore and steel intermediates. These measures should calm inflation, but if the European Union decides to ban oil and gas imports from Russia, oil prices could rise to $150 a barrel or more, experts say. returning all calculations wrong. S&P Global Ratings has already cut India’s growth outlook for the current fiscal year to 7.3% from 7.8%. It is Sitharaman’s job to navigate the Indian economy through the turbulent economic seas, and not announce any major policy moves that could yet rock the boat.