Pause before you pop up the Bubbly


Recently, the finance ministry informed the media that GST collection crossed Rs1trn mark after eight months, as the consumption in the economy picked up ahead of the festive season. The financial media highlighted this piece of information and presented as a definite sign of economic recovery. The financial market participants received the news enthusiastically and celebrated it by writing buoyant reports of an imminent economic revival.

The finance ministry however did NOT specify that in each of the past two years, the GST collections have failed to meet the budget estimates and this year also there is no possibility of budget estimates being achieved. For the past many months the state governments have been at loggerheads with the central government over the issue of GST compensation. The government has been drastically cutting spending on consumption as well investment to save the fiscal conditions becoming unmanageable that could trigger a rating downgrade and panic reaction from foreign investors. In September Government spending was just Rs2.32trn vs Rs3.13trn (yoy).

One can understand the enthusiastic response of stock market traders to each bit and piece of data improvement, but the moot point is whether the investors and businesses should also be celebrating it! This question is pertinent to answer, because the fact is that the Government of India has indulged in the fiscal repression of the worst kind, when the states world over unleashing fiscal stimulus of unprecedented proportion.

As per some media reports, “Centre will earn an additional Rs 2.25 lakh crore from new taxes on petrol, diesel and other fuels imposed since lockdown began. This is despite global crude prices touching record lows.” It may be recalled that the Centre has increased excise duty by Rs 13 per litre on diesel and Rs 10 per litre on petrol during lockdown besides  increasing road cess on fuel by Rs 8 per litre. State governments have also increased their value added taxes on fuel to make up for revenue loss amid the COVID-19 crisis. The additional tax on fuel is estimated to be 50% more than the GST revenue lost during April – October 2020. If we add to this the additional taxes imposed on alcohol etc., the figure of additional taxation would be much higher than the revenue lost due to lockdown. This is fiscal repression of unsuspecting people, who are still under the impression that the spending cuts etc. are due to a shortfall in tax revenue.

The fact is that Indian economy, which was one of the major drivers of global recovery post 2008 global financial crisis, is on crutches. There is little visibility that it will become the driver of the global economy again in the next 3-4years at least. The businesses and investors may have little to celebrate in the monthly GST or auto sales numbers. Traders may pop up champagne to celebrate Diwali!


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