The Centre and the States have to figure out how to get cash into the coffers instead of bickering over legalities of GST
That the pandemic has severely crippled the economy — what with low levels of production and activity resulting in a fund crunch — was evident at the meeting of the Goods and Services Tax (GST) Council. The Centre is simply not in a position to compensate States for loss of revenue emanating from GST implementation if the current method of calculation is to be followed. Therefore, Finance Minister Nirmala Sitharaman had no option but to invoke the “Act of God” clause. With huge job losses in the formal and informal sectors, the population has stopped buying anything but essential goods and demand are is at an all-time low, grunting the wheels of the economy. The GST compensation cess requirement is of Rs 26,000 crore per month for FY 21 because of the unprecedented pandemic, nearly double of Rs 13,775 crore paid each month the previous fiscal. Meanwhile, the States, already stretched to their seams in their pandemic management strategies, need financial resources to run their administrative system and create a safety net for the destitute and jobless. Especially with the probability that youth will not be able to find jobs this year or next, particularly in a country where millions enter the job market annually, rehabilitation schemes will have to be thought up. In Kerala, for example, hordes of returning expatriates will mean that State finances will go for a toss, given the lower income from consumption and higher expenditure. Therefore, Sitharaman gave States an opportunity to raise funds from the Reserve Bank of India (RBI) at a reasonable rate of interest. And the Centre also wants to make it easy for States to raise that money through Government securities so that they don’t need to compete for loans. But will these be enough? While these options might work for now, it appears increasingly unlikely that the Indian economy will recover in the next financial year as well. A proper growth is still half a decade away and that might break the entire basis of the GST Act with compensation for the States increasing every year by 14 per cent. How will this be managed?
How to get the economy going again will be a challenge for everyone, the States, the Centre and the RBI. Many companies that were viable before the Coronavirus are flirting with bankruptcy today. The amount of bank loans that will go bad once the moratorium ends will shoot up, and despite the Government mandates to relax conditions, banks have been hesitant to increase loans. There have been millions of jobs lost, five million in the formal sector according to the economic thinktank CMIE. From job creation, the Government has to pivot to job preservation. The challenges this will pose for a young population like India will be unprecedented in history as the economy is still fighting a disease burden while facing a geo-economic struggle with its eastern neighbour. The recovery will need answers that need innovative thinking. The States have been given a week to mull over suggested options, which are an example of some good ideas. However, these may not prove to be enough to jumpstart the economy but they are a start. If the States also find interesting ways to boost their local economies and re-assess their efficiencies, things could get moving. We should not count on foreign investors as the global economy is also hurting. As for the Centre borrowing directly from the RBI, which many have suggested, it has already increased its bailout entitlement for the current year by 50 per cent to over Rs 12,00,000 crore. While this covers Aatmanirbhar Bharat Abhiyaan, it has promised more stimulus packages and job guarantee projects. All of this could build inflationary pressure.
