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What impact will the current fiscal decisions of the government have on the economy?

The government’s decision to enforce the GST hike on July 18 evoked nationwide protests from political parties, traders and the public. But what implications will these decisions have on the state of our economy? Ravi Nair writes for The Probe.

By Ravi Nair
New Update


The Goods and Service Tax (GST) Council, in its last meeting on June 28, decided to correct some tax rates, withdraw tax exemptions on pre-packed and unbranded food grains and pulses, and impose a 5% tax, at par with the branded items. People were shocked when the new tax regime was enforced on July 18. Pre-packed and non-branded rice, wheat, pulses, dal, rye, oats, maize, wheat flour, suji/rawa, gram flour, puffed rice, curd, lassi, buttermilk, jaggery, natural honey and tender coconut water came under a 5% GST slab, hurting the pocket of the aam aadmi.

Santosh Mehrotra, human development economist speaks to The Probe on the state of the economy

When the criticism and protest caught up, the Union Finance Minister Nirmala Sitharaman tried to clarify the government's stand and the rationale behind the decision through several tweets. She said the decision was unanimous and was supported by every state. 

"Although the government says that this decision was taken by consensus at the GST Council, the fact of the matter is, there is a method that the GST council uses to arrive at decisions, and that's as follows: Within the GST Council, the Central government has a one-third say. BJP, which has many governments in power in various states, together constitutes a majority. Opposition will not have a voice in these decisions. So, there is no question of a decision by consensus," says Santosh Mehrotra, an author and a human development economist.

While the opposition has been disrupting the monsoon session of the Parliament over the government's decision to hike GST, experts warn that this decision will worsen the already aggravated inflation situation and lead to less demand and consumption in an economy which is struggling with stagnated income and low demand since 2018. 

Expectedly, the branded players and big retail chains welcomed the move, praising the government for creating a level playing field, but the smaller traders associations that represent local kirana store owners termed it an attempt by the government to destroy their businesses to support the bigger players. 

In May this year, India's Wholesale price index-based inflation shot up to a 31-year-old high of 15.88 per cent, and the WPI-based inflation stood at double-digit levels for sixteen consecutive months by June. 

When many traders' associations and mill owners across the country started protesting against the decision, the government came up with an explanation that 5 per cent GST would not be applicable if the listed commodities were sold in packets of over 25 kilograms. Again this is expected to support businesses that buy large quantities as opposed to the common man, who buys food items and other commodities in smaller portions. 

Other indicators 

Govt data showed in May last week that the country's per capita income of Rs 91,481 for the financial year 2021-22 remained below the 2019-20 level of Rs 94,270. 

The CMIE (Centre for Monitoring Indian Economy) data on employment for June shows that the unemployment rate on June 30 was 7.79 per cent (7.33 per cent in urban and 8 per cent in rural parts of the country). It also shows that the available jobs fell from 404 million in May 2022 to 390 million in June 2022, putting about 13 million people out of the employed category. As the government considers the periodic agricultural labour employment, the patchy monsoon at the starting of the sowing season saw a decline of eight million jobs. What is more worrying is that almost twenty-five lakh salaried jobs were lost in the same period. 

Another disconcerting factor is the ongoing trend of shrinking Labour Force Participation (LPR) rate. (The labour force participation rate is the percentage of the working-age population either working or seeking to be employed). The CMIE data shows a puzzling 38.3 per cent LPR (39.9 per cent LPR in rural India and 36.7 per cent in urban areas) for the month of June. According to CMIE, in March 2017, India's LPR was 47%. The government swiftly denied the report saying CMIE uses unscientific methods and its data is unreliable. 

A report published by Bloomberg disagrees with this stand. It states that the government is economical with its data dissemination and publishes only those data that it feels supports its claim. It cites the example of the government cutting down the recruitments to the defence forces to tighten the purse on revenue expenditure by launching a four-year contractual term for soldiers in the lower ranks of the military forces.

Another example is the Indian railways, one of the largest employers in the world, which has done away with 72,000 jobs in the last six years. The cash-strapped government is trying to liquidate public enterprises, including the profit-making sections of the Indian railway and national highways, which were constructed on public money for public use, by selling them to private enterprises at throw-away prices to meet its revenue expenditure. The Probe exposed one such instance - of privatising a public enterprise to a dubious entity - in detail a few weeks ago.

“Many MSMEs closed down in the last two years. In a time of downturn in the economy, the government is supposed to stimulate the economy by reducing taxes, but the government has done the opposite. The government should have increased the expenditures. The government did increase expenditures to some extent, but the size of our fiscal stimulus (direct expenditure by the government) was only 2.1 per cent of the GDP in FY 2021. To that, was added about an additional 1 per cent of the GDP in FY 2022. Compare this to the emerging market economies, on an average, giving a fiscal stimulus of 4.7 per cent of GDP. These are among the reasons why our economy contracted severely by 6.6 per cent in FY 2021 when the world economy contracted only by 3.1 per cent," adds Mehrotra.

Way forward

Undoubtedly, the economy will revive only if the demand is revived. "The government needs to cut petrol and diesel taxes as that will put money into people's hands. In addition to that, to cover the gap between the expenditures and revenues, it needs to put surcharges on Personal Income Tax and Corporate Income Tax. The Corporate Income Tax was reduced from 30 per cent to 25 per cent in one stroke in the middle of 2019. In February 2019, during the budget, the Personal Income Tax threshold was raised from 2.5 lakhs to over five lakhs. One of the implications of all this was that about 75% of the taxpayers went out of the tax net. So, the combined net result of these decisions was that the government of India lost on Direct Taxes alone about 2 lakh crores per annum. On the other hand, the government has been extracting about 3 lakh crores from us on tax on petrol and diesel," says Mehrotra.

Besides giving the tax benefits to the corporates, the government freeloaded the corporate players with tax benefits and performance linked incentives on their new investments in specific government-notified projects like renewable energy and the likes. If the government is serious, these sops from the public exchequer to corporates must be linked not only to them investing in these ventures but creating a certain number of jobs and retaining it for a couple of years to avail such financial benefits from the government. 

But can we expect that from a government that made it easier for corporates to donate anonymously to political parties -  including the ruling party - through electoral bonds perhaps for favourable policy decisions?