1 July 2020: The Indian Express Editorial Analysis
1) New red line-
GS 2- Government policies and interventions for development in various sectors and issues arising out of their design and implementation
- On Monday, the government banned 59 mobile applications with Chinese links such as TikTok, UC Browser, Shareit, and Cam Scanner.
- The decision, which comes amid continuing tensions between India and China, is the first clear message from New Delhi that it will review the rules of engagement.
- This is an interim order and firms have been given 48 hours to respond to questions on their compliance with data security and privacy but this marks a decisive break from the past.
- It serves as a statement of intent while sending a clear signal to China that there will be costs for acts of aggression.
- How to manage and respond to China’s growing assertiveness in the face of a growing power imbalance is a challenge for India.
- There is an asymmetry in power, a visible economic disparity. The Chinese economy is roughly five times larger than India’s.
- While India accounts for only 3% of China’s exports, China (excluding Hong Kong) accounts for 14% of India’s imports, and 5% of exports.
- But the situation at the LAC demands a response.
- In this context, the ban on Chinese mobile apps may be construed as low hanging fruit and a relatively soft target.
- Calls for boycotting all imports from China in this moment are ill-judged.
- Those using these apps have other readily available alternatives but Chinese firms stand to lose a fast-growing market.
- Given that India’s digital economy is tracked globally — it is one of the largest markets in the world for these apps — blocking access here does impact the valuations of the companies.
OTHER RETALIATORY STEPS:
- E-commerce firms have been asked to explore the idea of listing the product’s country of origin amidst a growing clamour in some sections for boycott of Chinese products.
- There is also the talk of raising tariffs, curbs on contracts in some infrastructure projects.
- In fact, earlier, in a move that was apparently aimed at Chinese firms, the government had made it mandatory for foreign direct investment from neighbouring countries to take prior approval to curb opportunistic takeovers during this period.
- However, given how pervasive Made in China is, how sweeping its presence in the technology space in India — its investments in a long list of Indian unicorns — each step will come with its own set of consequences.
- New Delhi should prepare for these and calibrate its response, step by careful step.
- India’s decision to ban Chinese apps sends a clear message on the road ahead.
- There is need to tread firmly and carefully.
2) Putting Reform to Test-
GS 3- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment
- GST faces its toughest test as it enters its fourth year.
- The upcoming challenge to GST, however, does not stem from its design or structure or the way it has been run.
- It is up against a pandemic that has wreaked havoc on the global economy and India is no exception.
- Despite the diversity that GST has had to contend with, it has been a remarkable success as a tax in the first two years.
- Faced with an unusually high benchmark of 14% CAGR, GST was very productive in the first two years.
- The base year revenue in 2015-16 stood at around Rs 8 lakh crore and for the nine months of 2017-18 that GST was operational, the benchmark stood at Rs 7,79,760 crore (at 14% CAGR from 2015-16).
- As against this, the actual GST revenue stood at Rs 7,40,650 crore, which is 95% of a very tall target.
- 2018-19 was even better with an actual collection of Rs 11,77,368 crore (99.34% of the benchmarked collection).
- However, with the economy beginning to slow down in 2019-20, GST could not remain insulated(protected).
- Barring April 2019, no other month witnessed double-digit growth over the last year, with September, October and March clocking negative figures.
- The average growth rate during May-August 2019 was 5.4%, which turned negative in the subsequent two months.
- With alarm bells ringing, the tax administrations tightened the belt which contributed to the 8.4% growth during the three months ending February 2020.
- And then the pandemic hit and collections tumbled by more than 8% in March.
FEW OTHER CHALLENGES:
- As we head into 2020-21, the toughest challenge for the GST Council would be to devise ways to compensate the states.
- The usual compensation cycle got delayed and the situation is not likely to improve anytime soon with the collection for the first two months of the current fiscal at just 46 per cent of 2019-20 levels.
- The pandemic struck just as the economy seemed to be looking up, which has led to all reform measures being put on hold.
- The new return system, rate rationalisations, measures to improve compliance and compliance verifications have all been held back, which has further dented revenue prospects.
- The biggest challenge is the possibility of a huge deficit in the compensation account.
- The 14% CAGR formula would lead to a situation where the protected revenue of the states would rise by about 92% from the base year figures.
- And even a 20% drop from last year’s figures would mean that the accruals to the states would be just above their base year revenue.
- In this scenario, the compensation requirement would be only a little less than 50% of the actual protected revenue for 2020-21.
- To put this in perspective, the actual compensation cess collection has never exceeded 20% of the total revenue accrual to the states.
- It is time to take measures to prevent the states from slipping into a serious financial crisis.
- These measures will not only define the future of GST but also the course of the unique cooperative federalism that it has ushered in the country.
- Of late, there has been a lot of speculation on the subject and most of it has centred around some kind of borrowing.
- However, borrowing is not the solution to a crisis of this nature, particularly in view of the financial impact of COVID-19.
- Many complex issues crop up in the context of borrowings. For instance, how and when will it be paid back.
- If, as suggested, the compensation period was to be extended beyond 2021-22 and the cess during the extended period used to repay the loan, will it not mean eating into future revenue streams of both the Union and the states.
- It would simply be deferring the crisis instead of really solving it.
- Alternatively, it is being urged that the Centre may borrow long-term to finance the compensation.
- This would give the Centre enough breathing space and the situation would ease in the really long-term, casting little burden on the Centre’s finances.
- This idea too is not worth pursuing since there are borrowing limits and the Centre is as much bound by fiscal responsibility.
- Another variant suggests that the Council may borrow on the Centre’s guarantee.
- In my view, the Council is probably not an entity that can undertake any such venture.
REJIG THE GST RATES:
- This leaves us with little option but to rejig the GST rates. This is not the time to tinker with the rates.
- But the idea must be debated when the worst is behind us.
- GST was introduced with rates about 20% lower than the effective tax burden (all existing central and state levies and the cascading effect).
- This rate has been further lowered, mostly intermittently, but majorly on two occasions — in November 2017 and July 2018.
- With a tax base of around Rs 60 lakh crore, a 1% increase in the tax rates would yield additional revenue of Rs 60,000 crore.
RE-ARRANGING THE GST RATE STRUCTURE:
- Another idea that may be considered along with the rate hike, or even independently, is re-arranging the GST rate structure.
A) 60% or 65% of the total tax on a commodity is the state component and the remaining is the central component.
- For instance, the 18% GST rate could be 11% SGST and 7% or some such combination.
- Historically, too, with the major cascading built into the states’ VAT rates, the states’ tax rates were higher than of the Centre.
- These adjustments in the GST rates would yield additional revenue to the states, thereby bringing down the compensation burden.
3) An Unreliable Emergency Fund-
GS 3- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment
- India’s forex reserves have crossed an unprecedented mark — over half trillion USD — placing India only behind China and Japan in Asia.
- And while it may seem like a ray of hope amidst the economic turmoil in the country, one must scrutinise its utility.
- The issue is not about a “few extra” reserves but unused “excessive” reserves.
- This may indicate that the Indian government is likely anticipating the need of an enormous economic stimulus and hence is banking on these reserves to support the failing Indian economy.
- If so, over-reliance on forex reserves to provide this stimulus may be dangerous and merely keeping reserves parked now is an opportunity lost.
FACTORS THAT LED TO SURGE:
- The recent forex reserves surge was a result of two things: A spike in foreign institutional investments and savings in India’s import bill.
- Foreign institutional investors reinvested in the Indian market in May-June 2020 after they exited their positions in panic in March.
- On the other hand, a global fall in fuel prices has reduced India’s oil import bill allowing it to save up forex reserves.
- But why does India keep huge forex reserves despite the government’s claim that the “fundamentals” of the economy are strong?
- Sufficiency of forex reserves is sometimes measured on how many months’ worth of imports can a country afford.
- While six months is considered sufficient, the RBI in December 2019 said it had enough to sustain for 10 months (the forex reserves were then $ 0.4 trillion). Today the cover is 12 months!
- This is despite having a sufficient credit line from the IMF, should there be a credit shock.
- It is understandable for oil rich countries — which largely sustain on international oil trade — to maintain high forex reserves.
- A single oil trade hiccup can derail their economy.
- Economist have theorised that holding high forex reserves are unnecessary.
- In fact not using them for mega-projects (like financing infrastructure projects) are lost opportunities — and yet the Indian government has held these reserves in liquid, possibly for its feared D-day.
- Has the Indian government been anticipating an economic hiccup strong enough to derail the Indian economy?
- Indeed, excess forex reserves are likely the government’s contingency fund that it may resort to should the Indian economy suddenly topple.
- The pandemic has in fact increased the government’s insecurity.
- A mere two months into this fiscal year and the government’s fiscal deficit stands at 58.6% of the budgetary target for the current fiscal year — a result of accelerating its budgetary spending to deal with the virus.
- Another possibility is that the government is accumulating these reserves as a “Plan-B savings” should India’s strategic disinvestment plans fail.
- Third, forex reserves are also likely a way for India now to maintain its global rating after multiple reductions in its GDP growth estimates.
- For instance, Fitch revised its India growth forecast for 2021-22 to 8 per cent from 9.5 per cent on June 30.
- The government needs something to give its investors to hold onto.
- Last but not least, the fundamental use of India’s foreign exchange should be to ensure the rupee stability.
- However, that hasn’t been the case. Despite steadily rising forex reserves, the rupee has fluctuated between 77 and 75 against the US dollar in the last two months, between 71 and 77 in the last three months, and 68 and 77 in the last one year.
- The rupee has become one of Asia’s worst currencies and the RBI may allow the rupee to devalue further to support its balance sheet, enabling it to transfer a big chuck of its realised profits as dividend to the starving government.
- With “Aatmanirbharta” or “self-suffienciency” int he spotlight, even financing imports is out of the picture.
- Neither will they be used to bid the rupee against other currencies since investors will not hold it.
- Clearly, not using forex reserves for its prime purpose despite having them in excess suggests that they are being held for an ulterior(hidden) motive.
DIP IN INVESTMENTS:
- But if the foreign fund influx is a plus, over-reliance on these floating funds that add to forex reserves to stimulate the economy might be poorly informed.
- The potential of these funds to switch direction should not be underestimated.
- In March alone, foreign institutional investments in India fell by Rs 65,000 crore (due to coronavirus panic).
- India’s foreign exchange reserves registered this impact — they shrunk by $ 12,577 million over approximately the same period.
- Reversing the dip, investments again went up in May, adding nearly Rs 14,000 crore, with some big corporate deals that restored forex reserves to their early 2020 levels.
- In June, Rs 6,000 crore worth of foreign investment came in.
- If the government does intend to use forex reserves as an emergency fund, it should ensure that they do not shrink just when they are most needed.