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Resource centre on India's rural distress
 
 

Forget fast growth, India is barely holding on. Just look at the data -Chaitanya Kalbag
-The Economic Times

Those of us in our sixties, including our prime minister, will remember the goli soda. You used a little wooden gizmo to push in a marble stuck in the mouth of a bottle and guzzled the sweet, fizzy drink with the marble dancing around inside. Then you felt full and happy. But it was mostly gas.

It’s feeling a lot like that these days, and PM Narendra Modi must have a tough time keeping our spirits up. Every few days there is a saccharine shot, but let’s face it – we are in the doldrums.

Demonetisation and the Goods and Services Tax (GST) have both extracted an economic price from nearly every Indian. The drumbeat of dismal data continues.

The Index of Industrial Production rose just 1.2% in July compared with a 5.2% rise in July 2016. IIP for the manufacturing sector inched up only 0.1% in July, compared with a rise of 6.3% in July 2016.

Consumer price inflation rose by 3.36% in August, up sharply from 2.36% in July and a cheering low of 1.54% in June, driven mainly by higher food and fuel prices. Since ‘dynamic’ daily pricing for petrol and diesel was introduced in June, prices have shot up. Modi’s government has hiked excise duties on petrol and diesel several times; although the price of Brent crude is half what it was in 2014, and the rupee has been stable, even appreciating against the dollar, the consumer is paying more and more. Petroleum minister Dharmendra Pradhan says the extra revenue will help the government spend more on roads, irrigation and other infrastructure.

Where else can the government look for more revenue? Despite the periodic sugar-highs we get from news of how successful demonetisation was in combating black money and driving more taxpayers into the arms of the friendly neighbourhood inspector, direct tax collections for the period April-August were up, net of refunds, just 17.5% year-on-year, compared with a year-on-year rise of 15% in April-August 2016.

The corresponding data for indirect taxes has not been published so far. By all accounts, two and a half months after it was introduced, GST continues to cause confusion and chaos. Rules are revised with metronomic regularity. Major carmakers have already announced they are cycling back on investment plans in the face of frequent changes in GST rates. At its 21st meeting on Sept.9, the GST Council of finance ministers and officials announced a fresh batch of officialese, including such gems as: “Presently, a job worker making inter-state taxable supply of job work service is not eligible for threshold exemption of Rs 20 lakhs (Rs 10 lakhs in special category states except J&K) and is liable for registration. It has been decided to exempt those job workers from obtaining registration who are making inter-state taxable supply of job work service to a registered person as long as the goods move under the cover of an e-way bill, irrespective of the value of the consignment. This exemption will not be available to job work in relation to jewellery, goldsmiths’ and silversmiths’ wares as covered under Chapter 71 which do not require e-way bill.”

Not for the first time, the GST Council extended the deadlines for filing returns. It set up a committee to look into exporters’ grievances. And it set up a ministerial group to look urgently into the glitches bedevilling the GST Network, the software backbone. Infosys, the main GSTN software vendor, was given time until end-October to sort things out. “It is like building a ship while sailing,” Bihar’s deputy chief minister Sushil Modi said.

The government cannot look to taxation as the main source of its revenue, so long as private-sector capital formation and demand remain sluggish.

Faced with stasis, the government is slipping into the same trap as its predecessor: it is speeding up spending on infrastructure in the hope that this will create more jobs and demand in the economy. By July, however, finance minister Arun Jaitley had already spent 92.4% of the full year’s budgeted expenditure, placing his pledge to rein in the fiscal deficit at 3.2% of GDP in grave peril. The government cannot sustain this level of stimulus for very long, unless the private sector rediscovers its animal spirits and revives investment.

In a speech early this year at the National Council for Applied Economic Research, eminent economist Vijay Kelkar said: “Public expenditure is grounded in taxation, and taxation is a considerable use of coercion. For this reason, we should be very careful when spending public money.”

Do you hear the rising murmur of unease in the background over jobless growth? An A.T. Kearney global survey published this week said India continues to top 55 countries in its Global Service Location Index in the outsourcing industry. But it warned that over the next five years, India could lose 250,000 business process outsourcing (BPO) jobs to automation. Currently India hosts 200 multinationals and has 1.1 million BPO jobs. BPO workers need to acquire new skills urgently.

PM Modi and Jaitley are brainstorming with advisers to map a path out of this morass, and on Wednesday Jaitley promised steps to revive growth as soon as Modi signed off on them. In his January lecture, Kelkar said: “Government interventions always have unintended consequences.

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