Context:

The slowdown in the GDP growth rate of India.

Details:

Denial from the government:

• There are concerns that the country’s present economic problems are structural in nature which would require the intervention of the government to revive the economic growth.
• There has been very little acknowledgement of the ongoing economic slowdown from the government, which prefers to term the present economic slowdown as cyclical and temporary. The problem has been that the government has been in denial and delayed action until after the Budget in July 2019.

Private sectors poor performance:

• The private sector, in its reaction to the economic slowdown, has lost confidence and is investing less, which is only aggravating the economic crisis.

• An RBI report suggests that business confidence, consumer confidence and capacity utilization are down.

The financial sector underperformance:

• The credit growth rate in India has been decreasing due to the reluctance of the banks to lend. The lack of monetary policy transmission is making the RBI’s monetary policy rate cuts redundant in reviving growth rates.

Limited leverage capacity of the governments:

• Given the performance of the private sector, there is no escaping the fact that the government has to garner resources and give a boost to the economy by increasing its investments. However, the economic slowdown has adversely impacted the growth of tax revenues for the government limiting its capacity to intervene. The Centre and the States are so short of resources that their fiscal deficit is burgeoning. 
• The fiscal deficit at all levels of government is already high so a policy decision is needed on how much more it can be.

The shortfall in tax revenues:

• The government tax revenues growth rate has been around 9% as against the assumption of a 12% nominal growth. As a result, in 2018-19, tax revenue was short by about ?1.5 lakh crore.

• The tax revenue shortfall was not reflected in the planning for the 2019-20 Budget. Therefore, given that the base for calculating tax revenue for the year 2019 was wrong and the rate of growth is incorrect, the revenue shortfall for the Centre will be even larger than 2018-2019 — around ?2 lakh crore.

Reduced State revenues:

• The States which are to get 42% of the centre’s revenue, will get ?84,000 crore less due to the shortfall in tax revenues.
• The concessions in corporate taxation of ?1.45 lakh crore will also mean ?58,000 crores less revenue for the States. 

• While the Centre has obtained ?1.76 lakh crore from the RBI’s reserves, no such succour is available to the States. The Centre will also get the proceeds of disinvestment but that is not shared with the States. In brief, the States will have a larger shortfall in resources than the Centre.

Goods and Services Tax Dilemma:

• The Centre is required to give the States: their share of Integrated Goods and Services Tax (IGST) and compensate them if the revenue growth of State Goods and Services Tax is less than 14%. This compensation is to come from the cess collected on sin goods and luxury goods. 
• One of the big contributors to GST has been the auto sector, but with sales falling over the last 10 months collections have declined. The Centre is apparently holding back the States’ share of IGST and arguing that the cess collection is inadequate to compensate the States for their shortfall.
• The States have also been complaining that they are not getting the funds that are due to them from the Centre. The Centre has partly responded to this by transferring more, but that raises the centre’s deficit.

• The dilemma is that if the GST rates are increased, prices would rise and demand would further slump, further aggravating the slowdown and shortfall in revenues.

• The recent Goods and Services Tax (GST) Council meeting in December 2019 ended without any raising rates of the GST rates. So, revenue from indirect taxes cannot fill the resource gap. 

Direct Tax:

• The problem of the shortfall in Tax revenue is compounded by the shortfall in direct tax collections. This is both the result of corporate tax concessions and the slowing economy.

• Income-tax rates cannot be raised now since that would be seen as inequitable — rich corporates will pay a lower tax rate than the middle classes, who pay income tax.

• There is pressure to reduce income-tax rates to boost demand in the economy. But a cut in income-tax rates will largely benefit less than 2% of the citizens who pay a significant amount of income-tax. They are well-to-do and unlikely to increase consumption. 
• Similarly, the cut in corporate tax rates will not boost demand since neither investment nor consumption will rise. The investment will rise only when capacity utilisation improves. Need to arrest the current declining trend in investment in India.

Unorganized sector missed:

• If the unorganized sector is separately accounted for, the economy is in a recession — it is not just a slowdown as official data based only on the organized sector indicates. 
• All governmental actions have been catered to the corporate sector slowdown and not where the problem originated from, the unorganised sector. The concessions to the corporate sector have narrowed the fiscal space available without raising demand.