Economic crisis is an act of God, says Sitharaman; Is it really so?

Fatima Hasan

When a new economic policy is announced, it is measured by how well it is doing in the public sphere and whether it is able to achieve its objectives. Based on the evaluation, the governments decide whether to go ahead with or withdraw the policy.  In a developing country like India, announcement of new economic policies will have to be considered, keeping in mind the long-term effects.

Back in 2017, on July 1, the very bold economic regime of goods and services tax [GST] was ushered in through the implementation of the One Hundred and First Amendment of the Constitution of India by the Union government. The GST replaced existing multiple taxes levied by the Central and State governments. 

And, recently, Prime Minister Narendra Modi announced stimulus economic package Aatma  Nirbhar,  which aims at self-reliant economy and this comes at a  time when the country is reeling under health crisis caused by Covid-19. 

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From the time when GST came into existence, the policy has been criticized for its timing. It was announced after the country witnessed demonetization and then there came the economic slowdown preceded by various factors which soon got the GST blamed for its poor design and implementation.

Besides adversely affecting small and informal enterprises (which find it hard and expensive to comply with GST’s numerous computerised filings and procedures), thus leading to a severe shortfall in tax collection, GST regime has severely affected government finances and the sharing of revenues between the Centre and the States.

Now, the severe financial crisis that the country is facing makes the people to   question about the decision to roll out GST and its timing of implementation.  When will the GST issues settle down once and for all?  What is the way forward?

As GST unravels, its glitches are coming to light with rising revenue shortfalls.  With this, thinking of self-reliant economy is a far-flung idea. The immediate need is that the country must first have to make economic recovery and then it can think about becoming self-reliant and a global power to experiment with the policies like this one.  The uncontrollable fiscal crisis brought by GST has impacted the GDP growth and it has made the States to suffer more.

Asking the States to borrow from RBI as the Centre cannot disburse the GST compensation, the government is trying to suppress the voices against it. It is high time that the Centre needs to acknowledge its setbacks and have to cooperate with the States in this tough situation. The possible way-out is that the Centre has to borrow money on its exchequer account from RBI and foreign institutions and reimburse the pending GST compensation to the States. It is only then the industries and businesses can start working.

So, let us look at some probable ways to address the present crisis and how can it be tackled. GST compensation has to be paid for the transition period from July 2017 to June 2022, but the compensation gap cannot be bridged using the Consolidated Fund of India.

In the GST Council meet held recently, the  Attorney General has put forward two options, one is to let the States borrow from RBI Rs 97,000 crore and the other option is to borrow the entire projected shortfall of Rs 2.35 lakh crore — both on account of faltering GST collections and the expected shortfall due to the pandemic. No FRBM relaxation has been mentioned for this option so far. 

We can go with the second option with a slight change, that is, the Centre should borrow on behalf of the States. The revenue loss by GST and the Covid crisis are two different things and have to be dealt differently and not to be seen as one. The Centre should bear the extra expenditure on interest burden on borrowings and not cut the GST compensation to the States.

How does non-payment affect the States?

Because of GST, the States no longer possess taxation rights after most taxes, except those on petroleum and alcohol and stamp duty, were subsumed under GST. The GST accounts for almost 42 percent of the States’ own tax revenues, and tax revenues account for around 60 percentof the States’total revenues. When the Centre is not paying the States the GST share, the States don’t get revenues on other goods and services items.

Hence, the Centre is ought to pay for the loss of revenue till the States can fully adjust with GST regime and there is an increase in tax collection.  Currently, the finances of over a dozen States are under severe strain, resulting in delays in salary payments and sharp cuts in capital expenditure outlays amid the pandemic-induced lockdowns and the need to spend on healthcare.

The Union Finance Secretary admitted GST collections had been severely impacted by the pandemic. Revenues are expected to be hit further as the economy is projected to record a recession this year.  This is a situation wherein both the Centre and the States have to cooperate as it is a 50:50 share .The government  must extend the bridge-gap year till 2024 at least. 

Also, the Centre has to learn from its blatant negligence and the GST Council has to include the necessary measures to meet the emergency situations brought by a pandemic like the present one.  And it cannot escape by saying that the crisis is an act of God. Rather, it needs to acknowledge and formulate the strategy to recover and achieve economic growth. 

Fatima Hasan is a Hyderabad based journalist

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