Case Studies

Roughly, three decades later and some time zones away, at New Delhi India, in the last half an hour of the Goods and Services Tax (GST) council meet arena on August 27, after hearing the stories from the state finance ministers, the finance minister Nirmala Sitharaman tried to deflect the ball into the state’s goal post by evoking the ‘force majeure’ clause, to argue that Centre is not In a position to make up for the state’s shortfall of GST collections. And she calls, COVID as an act of god. She gave two options to the states, either borrow from RBI or from the open market.

This is similar to using fist instead of head to score the goal. Her officers forgot that her mentor and former finance minister Arun Jaitley assured the states in 2017, with a commitment that the centre would play the role of elder sibling, in maintaining the spirit of federalism. He made a commitment that the centre will compensate for the revenue loss, to convince the states to give up their powers to levy taxes.

This callus stance of Sitharaman & her bureaucrats is neither in latter nor in spirit of federalism; and completely ante-commitments made to the states to win their confidence to be part of GST structure. Let’s try to understand the issue from her ministry’s perspective. The commitment was assessed, with assumption of 14 percent growth in the GST collections. Two variables in this calculation nominal GDP growth and buoyancy fell flat. So did the GST cess collection in slowing down fiscal 2019/20 and first quarter in the current fiscal under lockdown. The collection is almost 52.5 percent down, instead of growth. They are worried that the borrowing of centre would reflect negatively on the fiscal deficit numbers, which already is projected to cross 4 percent of GDP. And the further debt could be inflationary. The benchmark statistics touched 6.93 percent mark in July this year. But as country is moving out of the lockdown, many supply side bottlenecks will be declogged the inflation will come down, so will be the GST collections. At present centre has allowed companies embargo till November to file this tax. And many small and medium enterprises have opted for it.

It is the time to build the confidence of the businesses, but invoking force mejure will go long way to prove counterproductive. Instead of playing the role of elder sibling, Sitharaman’s ministry pushed the states to fend for themselves. The crisis is no time to reform states or give them sermons; it is time to extend help. Sitharaman gave two options to the states, either to RBI to monetise their debt or from open market. Her bureaucrat chits her, say, first either borrow upto Rs 97,000 crore to fill in for the GST revenue shortfall or go for Rs 2.35 Lakh Crore to battle the COVID.

The non-BJP ruled state’s finance ministers, like Punjab’s Manpreet Badal, West Bengal’s Amit Mitra, Thomas Isaac of Kerala, TS Deo from Chhattisgarh and Manish Sisodia from Delhi are publicly calling this as a blatant arm twisting, betrayal of the federal spirit; the finance ministers of NDA ruled states are making similar noises inside at the party platforms. The entry of Sitharaman’s husband Parakala Prabhakar to criticise her and her bureaucrats, ‘act of god’, not only reflected her marital discord, but also spilled the beans of ineffectiveness of the finance ministry to deal with this extraordinary situation.

Unfortunately, Sitharaman had a mediocre stint as MoS (independent charge) and later below-mediocre tenure as country’s first women defence minister during Modi 1.0. Her worst criticism was that she was unable to reign over the bureaucrats. And this is reflecting in her stint at the Finance Ministry as well. This fiasco is a glaring example.

Let me explain this; the RBI, technically, is banker for the state governments as well. But RBI doesn’t invest in the state governments’ debt neither in the primary market nor in the secondary market. The monetisation of state debt is not possible in the present circumstances. Sitharaman’s bureaucrats might not have told her, but reality is; the centre can. And RBI will be more comfortable dealing with the centre than 30 states. As an elder sibling; the centre could have taken debt and then extended it to the states.

The re-explore tapping the national small saving funds—like the money deposited in the post offices and small banks—through the non tradable securities. The return on this debt instrument is above 9 percent, the state might not be in a position to pay the hefty interest rates to use this money. The state discontinued using these facilities from 2016/17, but to again tap this, require extensive discussion with the finance commission. It is not an easy option. Similarly, the suggestion of tapping the Ways and Means Advances (WMA) too is complicated. As per the present norms, this is a short term money, and requires to be liquidated within 90 days not as a multi year measure. Earlier, in April this year, the limits for states under this window was extended by 60 percent, allowing them to meet their immediate expenses. But now, after monsoon, the states want to restart the capital expenditure to build infrastructure. This window doesn’t suit the requirements.

And states also can’t go to international markets, but the centre can. There are more options for the centre to raise capital and give them to the state. The act of god is an outbreak of COVID, finding out of the box solutions to this challenge requires an open mind and larger heart. In an hour of crisis, as an elder sibling it is expected out of centre, not from states. Maradona might have lived to tell the world about the hand of god legends, in the era of technology, this miss is impossible to be overlooked on the football pitch too.

(Mahajan is a Climate Change analyst & Commentator on Economy & Policy. She is also Co-Founder, Council for International Economic Understanding.)

Various non-discretionary as well as discretionary spending has started coming back to the economy. But not fully. And we also have to consider that in the previous fiscal, the economy was already slipping into slowdown. In 2019/20, the growth rate of 5.2 percent, started reducing quarter by quarter to first 4.4 percent, then 4.1 percent and then 3.1 percent. By the end of the fourth quarter, India started looking for lock-down options.

The lockdown numbers must be seen and analysed in shadow of the previous slowdown. The slowdown was happening because there was not enough money in the hands of the consumers. India is looking at a trajectory of achieving -12 percent in quarter ending September, and sub-zero by end of December and positives in March. The trajectory might look benign, but that is, because it is drawn in comparison to much lower base.

The real devil is the consumption. The contraction has killed the capacity and capability of the middle class to spend. This was already shrinking by the end of the fourth quarter of 2019/20. To bring this enthusiasm back, lot of sweat needs to percolate. There is a constant danger, the recovery could either get prolonged or might steep again by the end of the 2021/21, if the paying capacity of the consumers doesn’t increase. The contraction has already led to either loss of jobs or massive cuts in the salaries; the corporate earnings also have nosedived. This is counterproductive, if the country wants to get into consumption—discretionary as well as non-discretionary—expenditure.

The devil was in the details. the final consumption expenditure numbers’ contraction to 54.3 percent, compared to a 56.4 percent growth in the same period a year ago. This number is a realistic measure to track the household spending. The consumption also collapsed.

Most of the European countries which went through the lock-down had much less impact on the growth numbers. There were two reasons, a) their COVID cycle hit them early and b) the safety net they had for their citizens, allowed them to have enough money to start spending immediately after opening up.

How can India boost the consumption and increase money in hand? The biggest enemy of boosting consumption is fear of uncertainty. On August 31, India reported 79,457 infected cases, with a total 3,649,639 total positive numbers. India is rapidly narrowing the gap with Brazil. Despite repeated warnings from the centre, states are still making their own rules to create barriers and restrict economic activities. They need to understand, at this stage, lock-down is not a solution albeit aggressive testing and augmentation of healthcare is.

This will automatically shore up the trajectory of the vital stats. There is already -38.1 percent contraction in the industrial output, services —where bulk of the jobs were allowed with work from home facilities— shrank by 20.6 percent, manufacturing had contracted by 39.3 percent, trade, hotels by -47 percent. Remember these numbers were in comparison to the same quarter in previous years, when the economy was still growing by more than 5 percent. Mining is at -23.3. percent, Power and Gas is at -7 percent, Public Administration is at -10.3 percent, Construction at -50.3 percent, Real Estate at -5.3 percent.

These are the worst quarterly performance since independence.

So in this case, what can India do? Go for inflationary expenditure. But remember, inflation is like a steroid, and not the permanent solution. But to get out of the negative territory, there is no harm in taking this ecstasy. There is a need for massive escalation in the capital expenditure —public as well as private— in sectors like construction of roads, railways, airports, telecom, ports. Bring in capital from foreign shores to reposition India into the global value chain manufacturing. And RBI must cut the benchmark rates further. India is among the few global economies, that has the capacity to further cut down these rates.

This will not only allow the cost of capital for the businesses to come down, but would also give exchequer some headroom in servicing the debt. Since most of the sovereign debt is from domestic sources, the rate cut reduces the servicing rate.

At present, the centre has real issues on the GST collections. The moratorium on the bank’s repayment ended in August, but for direct and indirect tax payers the limit is extended till November end. The government receipt will not improve by then. The confrontation with the states on devolution of funds will continue.

On raising debt for states, only eight states have appetite to consume the 2 percent expansion of the fiscal deficit allowed by Nirmala Sitharaman led Finance Ministry. Most of the states have put an embargo on the capital expenditure till September this year, but would not have much money left to restart many of the projects. There are two options, a) if the centre takes debt on their own balance-sheet and then devolves to the states, or b) if RBI gives them an extended window with WMA. The centre also has another two extra ordinary options; a) to go for console bonds and b) print more currency.

Some of these initiatives will shore up the chances of integrating the economy into the already rolled out long term reforms to clinch the country’s potential in manufacturing and agriculture segments.

(Mahajan is a Climate Change analyst & Commentator on Economy & Policy. She is also Co-Founder, Council for International Economic Understanding.)