In India, the financial year was a complete miss. There were no business activities for over 60 days and for much of rest year no demand. From production to supply chain everything has been disrupted.
With the businesses and business community in disarray, government came out with Tax delay, Loans to delay loan instalments and cuts in taxes that were impossible to collect in the first place.
The ground realities point to a complete lack of Liquidity.
Indian Tax authorities have started hounding businessmen for outstanding dues. Business community is out of funds as their suppliers have not delivered, the services/products have no offtake and, in most cases, outstanding from Dec 19 not cleared. Add to that – the expenses from bloated electricity bills to rental costs – everything is hurting the business. While books seem to be still in profits bank accounts scream of lack of the liquidity.
Banks on their part too, do not want to inject liquidity into units with collection issues. They have been told to not disperse loans on discretion. So the banks are sitting on mountains of liquidity without off-taking it to market.
This lack of liquidity is fuelling inflation
One would expect, with such a big loss, fire sales to start in the Indian festival season. After all customer is both uncertain and out of cash, the companies have unsold inventory and there is possibility of exports. Still you do not see discounts of 30%-40% in any sector from real estate to white goods that can kick start spending. It’s a classic infaltory pressure. The cycle of people don’t buy enough for they lack money therefore causing companies to ask for more money per unit causing products to remain at higher than affordable cost has started.
Only Government of India can break this cycle
Imagine a government contract to overnight to buy 15000 cars of each and every empanelled auto manufacturer. Overnight this simple move can start rehiring in all major auto units. Or government decides to overnight pay all its dues to all its contractors – including ones with state governments.
Such acts of true fiscal governance can inject money into people and projects that will actually distribute it further to sub-contractors – ultimately reaching the very bottom of pyramid. This liquidity creation can go a long way in creating economic boom that can actually benefit form the GST regime.
Will government do it?
We are not sure. On one hand Government can feel confident after Ram Temple foundation start. On the other hand, they do not want their squeaky-clean image be held hostage to any fiscal impropriations. They know – with a large, direct injection of monetary liquidity its impossible that no one figures out how to take advantage. There will most certainly be whiffs of scams that will come at Modi government.
But then its like the question before Ram leaving for Van Vaas. If it wasn’t for the Vishnu Avatar then who else? Similarly, if government does not inject liquidity, no one else will
