The GST Fire

An exhibition of tanks by DRDO coincided with
the passage of the GST BIll in Rajya Sabha

The Goods & Services Tax which India has voted to bring in from April next year,  may while uniting the fragmented Indian market to the delight of India Inc., also exacerbate that `Elephant in the Room’ which the country’s economy has been grappling with for decades now – Inflation.

Global experience has shown that GST brings in its wake a rise in prices all around for at least a year before, prices settle down and even decline. Knowing India, and the way our businesses work, one cannot doubt that it would indeed be a small miracle if prices come down after rising. India Inc., is obviously happy with the tax as it means a uniform tax regime all over the country and an end to the hassles of delayed shipments due to Octroi queues at state borders. However, those who will have to bear the burden of the tax may not be as happy despite the news media trumpeting how the tax structure will make India more competitive.

That dreaded word which every retiree living on a fixed income and every salary earner whose increment is slower than the rate of price rise fears, is inflation. Will this fear which if and when proven true,  turn voter ire into a raging resentment around the time of the 2019 General Election ?

Are we already paying too high a price ?

Malaysia which adopted GST in 2015, saw an increase in retail inflation despite careful planning and leaving out many essential products from the taxation altogether. Australia’s John Howard Government almost lost the general elections after bringing in GST.

Canadian Conservative Prime Minister Kim Campbell actually lost the 1993 elections after the electorate protested price spikes induced by her predecessor Brian Mulroney introduction of the GST.   The Indian example is nearest to Canada with its two stage GST rate – one levied by the state and one by the Centre.

The Congress while demanding a cap on the nation-wide GST tax’s median rate, is possibly taking a leaf out of economic history and trying to position itself for the next General Elections, when it may well look to channel protests against  the initial bout of inflation which GST may usher in.

Former Finance Minister P Chidambaram has already made it clear that the Congress will campaign throughout the country demanding a low GST median rate. In case, (and it looks like they will), the Government chooses a higher median rate  and an even higher rate for luxury and sin goods, rest assured the Congress and other political parties who would include the BJP’s own allies, will lose no time in pillorying the ruling  party for its folly in unleashing the Inflationary monster.   

Goldman Sachs in a research note found that Asian countries which brought in GST between 1977 and 2015, all reported an average increase in inflation of 1.1 %  higher on average in the year of its implementation. Sachs also estimated, based on cross-country evidence and the evidence from state VAT implementation, that retail inflation in India could rise 0.9 percentage points if the GST rate were to be 20 per cent.

With retail food inflation having built up over the years, any further increase in inflation is likely to prove to be an incremental burden on the populace. Consumer price index was just shy of the 6% mark in June. Even more worryingly, Retail inflation in rural areas has consistently outpaced urban areas in the past 18 months, hitting 6.20 per cent in June, well above 5.26 per cent in cities such as Mumbai.

Reserve Bank of India Governor Raghuram Rajan’s harsh inflation targeting, which often led him to refuse to bow down to pressures to ease interest rates had put him at odds with successive finance ministers looking to pep up Indian growth suffering from a global industrial slowdown.

As a response to that `Nay-saying ' by Rajan, a new mechanism which the Government is ushering in may give the Finance Ministry a larger say in setting interest rates. Not so judicious decisions lowering interest rates to unleash growth may well upset the battle against rising prices and with GST fueling the price spiral, it would not give rise to just another academic Growth Vs Price Rise debate but perhaps another political Tsunami which would have the potential to shake not merely Mr Narendra Modi's government but also upset other apple-carts in forthcoming state elections to a number of key states. 

The Manifesto Game : Tweedledum & Tweedledee



Tweedledum & Tweedledee
 

 

In the land of Tweedledum and Tweedledee, what can you expect but election manifestos by ( who else? ) Tweedledee and Tweedledum, which read quite alike !

 

The Narendra Modi-led Bharatiya Janata Party, today came out with an economic manifesto seeking an India-wide Goods & Services Tax, which the Congress has been pushing for since when President Pranab Mukherjee was finance minister in the UPA Government.

 

Modi as chief minister of Gujarat had led a cabal of BJP-run state chiefs which had thwarted repeated attempts by Mukherjee, then finance minister and his successor in North Block, P Chidambaram who both sought to introduce the simple single point tax which would replace a plethora of central and state taxes and duties on manufactures, turning India into a single common market.

 

An attempt by Mukherjee, some five years back, to break the deadlock by jetting into Ahmedabad to hold direct talks with Modi did not succeed as the chief minister, while not objecting to the measure being brought in, brought in procedural objections.  Later on, attempts by Chidambaram to reach out to BJP leaders ahead of  Parliament sessions, met with similar objections. 

 

Narendra Modi with his Manifesto

The implementation of the new tax which will snuff out central excise taxes, additional customs duties, surcharges and state taxes such as VAT, entertainment and luxury taxes, lottery and gambling taxes etc., could well add 1-2 per cent to India’s growth rate, according to economists. Hence, the rush to be the author of scheme, and the desire to deny the other side the benefit of having launched it.

 

The on-going General Elections are widely expected by pollsters to yield a hung house, with BJP as the single largest party and Congress as the second largest. Regardless of which party is able to cobble together an alliance capable of forming a ruling coalition, this Government will depend on  other major parties for support in passing important legislation and hence a  consensus on GST is essential as the measure has to be passed by a two third majority in both houses of Parliament.

The original deadline for rolling out the nation-wide tax, of April 1, 2010 as well as several later deadlines have already been missed because of this crazy bit of opportunism and this may not be the end of the story if the Congress decides to do a BJP in case it sits in opposition ! 

The only major issue on which the two manifestos differed was on foreign investment in India’s $ 400 billion retail market. “Barring multi-brand retail, FDI will be allowed in sectors wherever needed for job  and asset creation, infrastructure and acquisition of niche technology and specialised expertise,” the BJP manifesto said.  Congress has already decreed it open, in the teeth of opposition from the BJP, the Communist parties and Trinamool Congress. While the Communists and Trinamool feel opening up retail to foreign investors like Wal-Mart, means selling out the country to global multinationals, BJP has more hard boiled electoral reasons for objecting to it.

 

Analysts pointed out that the 25-million strong small retail community in the country has traditionally been voting BJP and its earlier avatar Jana Sangh, hence it made sense for the party to oppose foreign investment into hyper-markets which challenge their businesses. Local big retailers like Reliance, Godrej and Big Bazaar have however not been opposed by the BJP, though business lobbies were quick to react to BJP’s opposition to FDI in retail terming it as “disappointing.” Said FICCI chairman Sidharth Birla “we feel disappointment on the stand on FDI in Multi-Brand Retail, we hold out hope for a possible review in the future.”

 

The BJP manifesto also blamed UPA for “tax terrorism” and uncertainty for denting the country’s image and creating anxiety among businesses, and promised a “non-adversarial tax environment”. The UPA government had brought in a retrospective tax law amendment after it lost a Supreme Court case against British telecom giant Vodafone from whom it had sought tax deductible at source for contracting purchase of Hutch Whampoa’s stake in its Indian arm at a tax haven. A case, which may have prompted Birla to describe the BJP manifesto as “investment friendly”.

 

The right-wing party’s manifesto also called for rationalising India’s tax system without going into any specifics. This is in sharp contrast to its 2009 manifesto where it sought raising tax free income to Rs 3 lakh a year, a demand which was echoed in a report on a Direct tax Code by a Parliamentary Committee chaired by Yashwant Sinha, former finance minister in the BJP led NDA government of 2001-2004.

 

The Congress-led UPA had  proposed the Direct Tax Code. However, it was unwilling to accept the Committee’s report in full, leading to a parliamentary deadlock on the passage of that vital legislation too. North Block had dismissed the demand for raising the tax ceiling and other sops sought by the committee, stating this could lead to an annual revenue loss of Rs 60,000 crore to the exchequer, which the Government could ill-afford. Some feel that with chances of being able to cobble a ruling coalition becoming brighter, the right-wing party now feels it is best not to make promises which may be difficult to keep.

 

However, this was not the only subtle indication that if voted to power, BJP’s economic agenda would be no different from that of the Congress. Both parties promised in their manifestos to boost India’s manufacturing sector, with BJP calling for turning India into a “Global Manufacturing Hub” and Congress calling for “building India as the world leader in manufacturing ... ensure(ing) 10 per cent growth”.



Rahul Gandhi with the Congress Manifesto
 

 

Both said they want to create a “single-window system” both at the Centre and States to expedite land, environmental, power and other approvals for investors. Both backed food subsidies, despite also calling for fiscal discipline in the same breath.

 

Not surprisingly, both BJP and Congress also promised to build high-speed rail, a project which was first thought of during the Manmohan Singh government’s as India's response to China's high speed tracks. The Government identified some six routes for taking up the high speed project. Said a Railway Board member “like everything else both parties want to take credit for whatever the system throws up which may prove popular and disavow hard decisions like raising fares and cutting subsidies, which prudent economics demand.”