These days our conversation by and large revolves around financial issues with ersatz economists holding forth on the impact of GST, tax collections and the like. Probably, in this respect, the public discourse mimics that of the Government.
Every day, without fail, there is some big ticket financial announcement by the Government, which is promptly picked up by the media and endlessly debated ~ on party lines ~ on TV channels. The Government side pulls out all its stops to prove that the economy is doing exceptionally well, while the Opposition tries to prove the converse.
Even in serious newspaper articles, some random statistics are pulled out by the Government side to show a well-performing economy, while equally random statistics are bandied about by the naysayers. No one really cares for the plight of the common man who is directly affected by the state of the economy.
Traditional wisdom tells us that a country’s economy is a function of various sectors ~ agriculture, industry, services etc. and not vice-versa. Currently, the importance given to the financial sector ~ to the exclusion of all other sectors ~ leaves one wondering if the financial sector is the be all and end all for Government. A case in point is the Prime Minister’s speech on Independence Day, which was chock-a-block with financial statistics.
However, there is nothing very remarkable about the state of our economy, to merit this intense debate. We had a 5.7 per cent growth in GDP in the last quarter which is not to be sneezed at, but on the other hand the declining trend of GDP over the last six quarters is a cause of concern. Some sectors of the economy like automobiles are doing well, some like consumer durables are recovering but sectors like realty are not doing well at all.
There are a number of positive indicators; inflation is down, industrial production is increasing, exports are looking up and most importantly the Government is paying attention to banking sector woes. But, on the other hand, some negatives are clouding the horizon; there are signs of agricultural distress, new jobs are not being generated, capital formation is heading southwards and total factor productivity (a measure of technology input) is stuck.
After an analysis, what emerges is that the economy is sending out mixed signals; what the future holds for us will depend on the managers of our economy. For starters, the Government should desist from taking impetuous decisions because after demonetisation and GST, everyone fears precipitate action from the Government. Then myriad changes in a short time, particularly in the GST regime, have created a climate of uncertainty.
Variation of a few percentage points in the GST on some commodity is no big deal for the GST Council but marks the difference between profitability and survival for a small manufacturer. Businessmen are waiting for the GST regime to stabilise before embarking on new ventures. Perhaps, this is one of the reasons for the drying up of private investment; which in turn is responsible for the drop in the growth rate of GDP. The Government would be well advised to declare a moratorium on changes in the tax structure till the next budget.
In addition to a shifting stance, the Government often makes statements of uncertain provenance like “the economy had a healthy growth during the demonetisation period” eroding public trust in the utterances.. Such statements fuel a contentious debate, making the public even more distrustful of the Government and dampening market sentiment, which is essential for economic growth.
Perhaps, the time has come for the Government to redirect its attention from black money and taxation to more substantial issues like job creation and infrastructure upgrade. Outlawing black money suddenly had the effect of disrupting supply chains and reducing jobs but did not deter holders of black money much, as evidenced by the return of almost all of the banned currency.
The ill-equipped tax department is now left with the virtually impossible task of proving that the banned currency deposited in bank accounts had been earned by tax evasion. A more thought-out approach to stamp out black money would probably have yielded better results.
Unfortunately, GST which could have been a game changer was designed with an “accountant’s approach”, with an intention to increase tax collection and not with a view to provide any advantage to assessees. This prevented a wholehearted acceptance of GST. Further, its implementation was a breeze for the big guys who hired big ticket tax professionals but GST left the small players flummoxed. Small businesses definitely face an uncertain future because they are out of the regular stream of GST and bigger businesses will not get any benefit by buying from them.
Really small businesses are worse off; they have no one to handle their paper work and are slowly folding up. The fact that only 45 per cent assessees have been filing GST returns has its own story to tell. The Government’s logic that GST, because of its cascading nature, would bring down prices even if its rates are the same as VAT is unconvincing; the consumer has to pay the final impost which would be the same in both cases. In short, higher rates of tax and inbuilt complexities impaired business operations and also impacted tax collection negatively. It is noteworthy that the Chairman of the Central Board of Excise and Customs (CBEC) has stated that the current year’s GST collection targets would not be met.
Contrast this with an imaginary scenario. Goods are either exempt from GST or taxable at only three rates ~ 4, 8 or 16 per cent, without surcharges. There is only one kind of GST… not the four kinds at present. The Government ensures that tax incidence under GST is substantially lower than the earlier VAT. Before implementing this tax regime, the Government launches a programme of GST awareness and registration at all excise and sales-tax offices where a software programme, which simplifies account management and seamlessly generates all GST returns, is given to all assessees. Small manufacturers are kept out of the GST net; bigger players buying specified items from them get tax credit which encourages the MSME sector. Finally, the bells and whistles of GST; GSTR-2, Way Bill etc are kept in abeyance till the system stabilises. Had GST been implemented in this fashion there would have been no resistance.
However, some glaring anomalies need to be addressed by the Government. Contrary to the general economic trend, Forbes has reported that last year 75 per cent of the new billionaires were either from China or India and Mr Mukesh Ambani increased his wealth by Rs one lakh crore i.e. around 0.7 per cent of India’s GDP. It would thus appear that the major part of increase in our national wealth goes only to the top few people. In addition to being morally indefensible, this is bad economics because individuals who have so much wealth would hardly spend any part of it. Had the Rs10 lakh crore increase in our country’s wealth been equally shared by all households, a large portion would have been spent, providing a huge impetus to the economy.
Similarly, despite a slowing economy and a not too optimistic outlook, the share market is at an all-time high showing that share prices are not a function of the assets represented by the shares but have a dynamics of their own. The share market including the commodity market has to be properly regulated so that idle money is not used for speculation in shares but is put in productive channels.
Recognising the need to revitalise the economy, the Government has announced a fiscal stimulus for bank recapitalisation and road-building on a massive scale. This stimulus would take time to show results because bank recapitalisation has to be followed by increased lending which can rejuvenate industries only after a time gap. Similarly, road-building takes a long time and funds allocated for the same would be spent over the years.
More innovative steps are imperative. First, the Government should make a holistic review of the economy. Distressed sectors like agriculture should be identified and propped up. In the short term, a much speedier alternative to panic spending would be to reform the taxation system in a way that it places the indigenous manufacturing industry at a price advantage vis-a-vis Chinese imports and also lessens the GST imposition on the common man.
This would rejuvenate the manufacturing industry and boost demand. Direct taxes (which are progressive) and not indirect taxes (which impact the rich and poor equally) should be the main source of revenue. Imposition of taxes on inheritance and wealth should be considered. These steps would bring in revenue to the Government and ensure distributive justice, leading to a healthy economy and an egalitarian society.
(The writer is a retired Chief Commissioner of Income Tax)