GST countdown (The Hindu - 5 June 2017)

     There is still no clarity whether the loose ends can be tied up in time for the July 1 deadline

     The Goods and Services Tax Council has finalised the rates at which tax will be levied for almost all products and services under the tax regime, just four weeks before the July 1 deadline for rollout. The decisions amount to a balancing act between competing demands. The Council has set the tax rate on gold, silver, diamonds and other jewellery at 3%, while uncut diamonds will attract a ‘notional’ duty of 0.25%; a credit can be claimed for exports of such diamonds after they are polished and cut in India’s gem clusters. Footwear and readymade textiles will have differential tax slabs based on sale price (with a concessional 5% for footwear below ₹500 and clothes below ₹1,000). But oddly, no such distinction has been made for mass consumption items such as glucose biscuits. Textiles, leather, diamonds and food processing already are, or have the potential to be, India’s biggest employment engines, and repercussions of tax structure anomalies can be felt hard and fast in a competitive global market. Though the low rates on gold and diamond can dampen smuggling opportunities, they introduce two more rates to an already complex GST structure of five rate slabs plus a variable cess on ‘sin’ goods. Taken together, with the exemptions for critical sectors such as real estate, electricity, petroleum and alcohol, GST in its current form is far from the ‘One Nation, One Tax’ it purports to be.

     Not surprisingly, fresh demands for differential tax treatment have begun already, including for bidis. States and sections of industry want a review of rates finalised earlier for products ranging from biogas, fertilizers and tractors to agarbathis, human hair and cashew. Actor Kamal Haasan has threatened to quit cinema as it has been included in the 28% ‘sin’ category, and States have backed the demand that regional cinema be treated differently. The Council is slated to meet again on June 11 to discuss these demands while taking a call on a few pending items such as lotteries, and finalise rules pertaining to accounting and e-way bills (to be generated to transport goods). An assurance of input credit on existing stocks with dealers and simpler rules for filing returns should help industry gear up for the transition. But in the absence of final accounting rules or clarity on the anti-profiteering framework, there is concern whether all the loose ends can be tied up this month. The government is sticking to the July 1 deadline despite reservations about the readiness of the administration and the GST Network that would have to manage billions of invoices. The Council must take a realistic and honest stock of ground realities at its next meeting. A sub-optimal GST design can be corrected over time, but a hasty beginning could prove costly.

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GDP slowdown: Demonetisation’s fallout has hurt the economy but there are reasons to be optimistic (The Times of India - 02 June 2017)

     

India’s economy, or gross domestic product, grew a disappointing 6.1% in the January-March quarter of 2016-17. This growth rate however was not surprising. A deceleration in the pace of economic growth was evident from the beginning of the financial year. This was worsened by the disruption on account of demonetisation. Despite a slowdown in economic growth some positive features such as macroeconomic stability are reasons to remain optimistic. But they need to be complemented by a sharper approach to economic policy making. This will put India on an elevated economic trajectory.

       The highlight of January-March quarter data is that the widely anticipated fallout of demonetisation showed up. Sift the data and what is apparent is that agriculture was a saving grace on account of a good monsoon last year, and government spending shored up consumption. But it is worrisome that construction, a key provider of jobs for surplus rural labour, shrunk by 3.7%. Demonetisation appears to have taken a toll here. Other areas in the economy’s service sector such as trade have also been adversely affected by demonetisation. Consequently, the quarterly growth in gross value added was just 5.6%, the fourth consecutive quarter which witnessed a slowdown.

      GDP data also showed that some of the longer term problems continue to cast a shadow on the economy. The anaemic pace of increase in bank credit and a contraction in fresh investments checked economic momentum. Fixed investment as a proportion of GDP has been declining which means demand from consumers is the main driver of economic momentum. This feature is linked to troubles of banks. Indebted corporates have not been able to service their loans to banks, which has led to the latter’s problems of bad loans – making banks risk averse when it comes to disbursing fresh loans. The end result of these enduring problems is that the economy is functioning below potential.

      Looking ahead, there is reason to be optimistic, as some of the problems on account of demonetisation have faded following the introduction of new currency. But other enduring problems need to be forcefully tackled. The recent ordinance empowering RBI to deal with bad loans needs to be followed through. Government should also be ready to recapitalise banks that have to take a hit on account of resolving bad loans. Once health of banks improves, the Indian economy will be on a firmer footing.

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Back to basics: on the dip in GDP growth (The Hindu - 02 June 2017)

The dip in GDP growth in the January-March quarter points to the need for a policy reboot

India’s economy, measured by the gross domestic product, grew at 7.1% in 2016-17, the slowest pace since the National Democratic Alliance government came to office in 2014, and significantly lower than the 8% growth clocked in 2015-16 (revised data). On the face of it, this is in line with the estimates put out by the Central Statistics Office in early January and at the end of February. A top government economist has lashed out at ‘messiahs of doom’ who had predicted a 2% decline in growth due to the Centre’s decision to demonetise ₹500 and ₹1,000 currency notes last November. But scratch deeper, and those naysayers don’t appear to be too far off the mark. Growth in the final quarter of 2016-17 was just 6.1%, all of 1.8 percentage points lower than the 7.9% recorded in its first (which decelerated to 7.5% and 7% in the second and third quarters, respectively). In fact, the only reason the 7.1% estimate has held up is because growth for the previous quarters was revised upwards. Finance Minister Arun Jaitley is, however, right when he points out that growth had already been slowing down, so ascribing the entire downturn to demonetisation is not fair. Yet, whichever way one looks at it, the note ban seems to have exacerbated the problem, particularly for India’s large informal economy that the poor depend on, as even the World Bank has now noted.

Consider these underlying trends. Discounting the healthy growth in GVA (gross value added) from agriculture and government spending, real GVA grew by just 3.8% in the fourth quarter, down from 8.4% in the first — indicating that private spending and investment collapsed. Private consumption grew at the slowest pace in five quarters, even as construction (with a high dependence on informal/migrant labour) and manufacturing activities dipped sharply. Industry has renewed pleas for the Reserve Bank of India to cut policy rates and shift back to an accommodative stance. While lower inflation and growth may soften the RBI’s outlook, there is little that monetary policy alone can do at this juncture to revive animal spirits. Banks, the primary beneficiaries of demonetisation, are flush with funds but credit growth is at multi-decade lows — and the twin stress on banks’ and their borrowers’ balance sheets is spreading to other sectors such as telecom. With the direction of global headwinds remaining uncertain, growth in government spending budgeted to be lower this year compared to last year, and private investment virtually absent, these GDP numbers should serve as a reality check. Returning to the 8% growth mark is going to be a big challenge. While the government has vigorously underlined its reform achievements of the last three years, such as the Goods and Services Tax that rolls out in July, a mission-mode reforms reboot is urgently needed. And that can only begin if the problem is suitably acknowledged by policymakers.

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एफआईपीबी : इसके बाद आगे क्या ? (Rajasthan Patrika - 01 June 2017)

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