Snakes and Ladders

Today, we'll talk about COVID, GDP & GST. . .

Abhishek Sahoo

Sep 05, 2020

Hey fellas, how’re you doing?

Bad day, is it? Nah..

In every life, we have some trouble. But when you worry, you make it double!

Don’t worry, be happy.

- Bobby McFerrin

Roll the dice! Got to 3? Great, ladders-up to 22. Got to 27? O heck, snake-down to 1! Yes my friend, that’s our childhood bosom pal.. the game of Snakes and Ladders. And you know what.. more importantly, that’s life! Everyday is a new surprise.. just the way life tricks you, and you know it only when the dice rolls! And, there are some days so consequential and decisive that you just can’t look away. Such were the previous two weeks for me, in fact, for many of us. This was when India played the game and came down to the single-digits! I was actually writing about another interesting topic, but these days were so action-packed that I couldn’t help but write about it! Okay, so let’s begin the post-mortem.

Here, we go…

The Double Feat

Oh, our ancestors must be so proud! After all, we’re making headlines.. the land of culture, the land of resources, the land of great minds, our Sone Ki Chidiya has set a new benchmark in front of the world. Everyone is talking, it’s official now: India has managed to become the global leader in the number of new daily cases of COVID-19 and the worst performing of all major economies during the pandemic ! How did we manage this double feat, you ask? Well, certainly not due to an ‘act of god’, but because of the ‘incompetence and apathy of our current leadership’, as someone puts it succinctly.

It wasn’t long when on 29th of August, India set a global record for highest number of fresh cases in a day (about 79k). Fast forward 7 days, and it breaks its own record with a single day rise of about 86k cases! And what do you hear? Hmm? That it’s because we are testing more! And yeah, we’re ‘flattening the curve’, and how is that? Oh, with the (completely meaningless) indicator of recovery rates! Isn’t the recovery rate bound to improve with more and more cases? Have you any answer as in what is improving with a greater magnitude? No. But oh, you speak of the testing rates.. well, for you to note that so far, almost 22 of the most impacted countries are above us in terms of testing rates (per million of population) and that we’re testing only about 13% of what US does and 50% that of Brazil, the only two above us in the affected chart. Although it may seem costly.. but tracing, isolating and testing are the only effective way of combating the pandemic! Shutting down the country isn’t a solution, it’s just the deferment of the disaster! It’s high time and the onus is on the Centre to spend now, which it should have done much earlier!

What to say about the economic state of affairs! It’s Monday and the Government comes up with another grim figure.. India’s estimated GDP contraction rate is about 23.9% in April-June 2020 (in comparison to the same quarter in 2019)! That’s the worst performance among G20 economies and even compared to other South Asian countries, and also what India had never witnessed at-least for the past two decades! Now, there are very chances that this is an absolute underestimate! Why, you ask? See.. basically everyone from the likes of Ambani and Mittal to Chandu Chaiwala contributes to the GDP. While you can obtain business data from the corporates, you can’t reach out to so many small hawkers and peddlers for their figures! Now, how to proceed? Umm.. we have a jugaad.. why not use the formal sector (companies) as a proxy of the informal sector (small shops and hawkers, etc)? I mean, seriously? It’s well evident that informal sector is worse impacted than the formal! Then, how’s this adjustment reliable? No, we don’t know that. Only God knows!

And that’s not all.. as you can see, except the agriculture sector (thanks to the bumper rabi harvest and good monsoon), all others declined sharply, and especially the labour-intensive sectors! Months ago, at a time when testing was the only weapon, the Government shut the shops and sent everyone to closed doors (just like home detention!). Labourers ‘walked’ (literally) back to villages, with no source of income, with no so social protection and unwittingly spreading the disease in the rural areas with poor health facilities! Inability to afford food and nutrition again added to the disaster! Oh, and now, you are asking them to get back to work, at lower wages, even when the pandemic is at peak. Ridiculous! Sluggish demand, poor investments, disrupted chains and the daily figures indicate that the worse isn’t over yet!

Okay, okay, enough of grudges! Now what? What’s the way ahead? Surely, there is a solution to every problem and as they say ‘extraordinary times require extraordinary solutions’. The only way out is the Government strategy on both health and economic front. It’s high time we need a genuine fiscal package (a stimulus, not a liquidity support). And as a professor of economics at JNU puts it —

This will cost money, for sure; but not doing this will be even more costly for the economy and the people. Not spending now will push the economy into a deeper hole, reducing incomes and, therefore, also taxes, and creating a bigger fiscal deficit even with lower spending. For now, these increased expenditures can be paid for by the Centre borrowing from the Reserve Bank of India (monetising the deficit, as governments across the world have been doing). This will not be inflationary as long as essential supplies are maintained, because demand is currently so low. Eventually, wealth taxes and taxes on multinational corporations (especially digital giants that manage to avoid taxes) must be thought of. Bold thinking and urgent action are the only way out.

And btw, people also must realise that this is ‘unlock’ and not ‘unlimited’! While we can’t halt our activities, we need to observe absolute caution with the masks and other guidelines. Also, there is a need to give a boost to the demand and investments, especially to the indigenous and small enterprises, which has to come from the public side. Let’s be responsible citizens and help India to fight the pandemic! And as Barack Obama once said (applies to any country) -

In the face of impossible odds, people who love this country can change it.

The Almighty’s Endeavor

Well, ‘act of god’ is too mainstream, I needed a fancy title, so - ‘The Almighty’s Endeavor’.

Well then, what exactly is the context? Was it even a genuine thing or a click-bait? Wait, wait, don’t worry, let me help you out. If you aren’t aware, the whole matter was about GST compensation by the Centre to States. Oh. And how did we reach here, you ask? Umm.. let’s go from the start..

The Government of India rolled out GST in 2017. But the states objected it. Why so? Because GST was a consumption-based tax, whereas earlier taxes used to be production-based. But what does it mean? Well, the new system benefited the consumer states and not the producer states. For example, suppose you are the government of West Bengal. You invest a lot of resources, infrastructure and manpower to encourage the manufacturing of indigenous goods. Now, you export stuffs to say Jharkhand. And then, Jharkhand collects taxes on the goods imported from your state just because it is consumed there! You, as the the government of WB, how would you feel? It would be like wasting all your resources, isn’t it? And obviously, you would not give consent for the implementation of GST. Oh, now what could the Centre have done? Let’s take it this way —

Put yourself in the shoes of a mother. What would you do if your child is unwilling to eat a piece of bitter-gourd (that’s karela.. and who loves karela!)? Well, parents no longer use force. Perhaps you would try to entice your child by offering him/her a chocolate if he eats that thing! And perhaps one chocolate won’t work, you may need to offer his/her favorite gaming console if he eats it daily!

Now, assume the Central Government is the mother and the States are its children. To entice the states to accept GST, the Centre had to provide the chocolate and the gaming console, and they did! They ensured the states that they would be compensated for any shortfall between: (a) actual revenues collected by them on goods ‘consumed’ and (b) revenue growth rate of 14%. This rate was more than reasonable, just to lure the states into the new scheme! And.. the chocolate and the console lured them in to accept the bitter-gourd; i.e. the states accepted GST. Now, to provide for the shortfall, the Centre kept extracting a cess over and above the taxes from products like tobacco. So far, the Centre was supposed to pay about 3 lakh crores to the states as compensation, out of which 65k crores could be paid out of the cess collected. And it was all okay until last week. Then, one fine day, the finance ministry comes up (with a narrative) and confesses that it won’t pay the 1.38 lakh crores of its dues to the states, which according to the Centre were due to COVID. Stating that it was because of an ‘Act of God’, they (shamelessly) denied the payment! Betrayal, isn’t it?! Must have been inspired by the bollywood movie plot, you think so, right? Well, may be! After all, this is India, and the Centre knows this.. take the name of the God, and everyone is like ‘hawww’!

Btw, what exactly is an ‘Act of God’ ? In the words of A. P. Herbert - “An Act of God was defined as something which no reasonable man could have expected.” And no man on this Earth could have expected the break out of this pandemic. That’s okay. But what is its legal interpretation? Well, it’s something called force majeure (an unexpected event that relieves the parties to a contract from performance of their obligation); e.g.: Taylor vs Caldwell. One important point to note here is that it requires the contract to be a private contract. But the case of centre and the states is in-fact a social contract where the livelihood of citizens depends upon the decision! And hence using the clause to deny its debts isn’t acceptable! So, it’s quite evident that it was more kind of a bait used by the Centre to forego its liabilities!

This withdrawal of the contractual promise could spell the end of what has been a poorly conceived, badly planned and worse implemented GST! State Governments face hard-budgets and have given up their revenue raising power to the GST! They have spent huge sums to deal with the crisis and now are running out of money! Now, the Centre is denying them their compensation and asking them to borrow (the money it owes to them) even though they aren’t sure how to repay! This will badly impact states’ expenditure for the rest of the year, and indirectly, the citizens in the form of reduced basic services!

And this is for our finance ministry (the messenger of god!) —

This was not an act of god. The negligence is pretty clear cut.

- Joe Russo

~ let’s prepare for the worst (god forbid!) and hope for the best (fingers crossed!) ~

So guys, here we are, hope you loved playing the game. Btw, truth being said, I wanted to write about a host of other topics like the issue with AGR dues, border tensions and the one about Question Hour. But that would be too long to digest! So, let’s keep it for some other day.

Well, let me thank you for coming this long! And yes, I really appreciate the encouragement received from you all for the former articles. Loved to see your enthusiasm, it really means a lot to me! Thank you so much :)

Keep supporting, and I promise you won’t regret!

If you loved this article, if you have a connection who is really puzzled with all these events, do share this piece with them, and I can reasonably assure that things will start making sense to them!

I would love to receive your valuable feedback and suggestions for improvements.

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