GST, unlike demonetisation, is poised for painful success
Three weeks after its launch, the goods and services tax (GST) — with all its "goodness" and "simplicity" — is poised to deliver an interesting paradox to demonetisation. With its loud schadenfreude plot, the note ban crafted a convincing political success for the ruling dispensation in spite of its colossal failure on most economic and monetary parametres.
GST is likely to unfold a vice-versa. It is all set to deliver fiscal success and improved GDP figures on paper, if not felt on the ground. However, it may turn out to be a political dampener with its direct negative impact on jobs and cost of consumption.
Note ban gambit
The Reserve Bank of India’s (RBI’s) credibility is not the only victim of the demonetisation gambit. While it is busy covering up the botched monetary adventure, the collapse of the note ban has been manifested in most of the areas where demonetisation was expected to yield miracles.
The economic report card of demonetisation is terrible. India’s growth rate in the March quarter — the first after the note ban which represented the impact of demonetisation — fell to 6.1 per cent from the 7 per cent recorded in the December quarter of the same year.
If the organised and formal economy was shattered so badly, one can only imagine what would have happened to smaller units running on cash as well as small businesses and livelihoods. Besides, the Gharib Kalyan Yojna launched at the time of the note ban could recover only Rs 5,000 crore of declared black money with the government itself admitting it was a flop. Similarly, no tangible impact was seen on terror financing.
Six months after demonetisation, digital payments lost their momentum as cash circulation reached close to the pre-demonetisation level, as per the latest RBI financial stability report.
The nation was told that through the note ban complete information about black money was being collected, but raids and investigations seemed to have stopped right after the UP elections got over. Last but not the least; demonetisation resulted in the loss of roughly 1.5 million jobs, according to a survey by Centre for Monitoring Indian Economy (CMIE).
Nevertheless, the narrative of punishing the rich Peter to pay the poor Paul worked well with the masses and resulted in a massive electoral win for BJP in the UP elections, thus making note ban a huge political triumph.
GST disruption
Now, fast forward to GST. Despite its several discrepancies and anomalies, the cherished tax reform will yield substantial gains for the government. Tax reforms always come with learning from the past and GST is no exception.
Going by its design, GST will not only bring in more revenue but also help the government show success in GDP numbers.
Revenue grosser
With its revenue-neutral design and slotting of high-value products into higher slabs, GST guarantees no risk to the revenues of the Centre and state governments. Petro products, the biggest tax grosser, have been kept out of the GST and are open for unrestrained taxation. As the majority of commercial transactions in the organised sector will have to be registered under GST to avail input tax credit, the reform is definitely a boon to the government’s coffers.
2. Input Tax credit frauds were rampant in the erstwhile system of excise and service taxation. As per the internal estimates of revenue mandarins, the government loses Rs 1 lakh crore annually on account of bogus credit claims. GST will curb these frauds and the government accounts will accrue the benefits.
3. As tax exemption limits are reduced, GST will inflate the tax base by bringing in new assesses into the tax net.
GDP positive
1. Unlike the note ban, GST will help the government notch higher GDP numbers. As supply chains will be exposed to GST, the traders and wholesalers are likely to register higher turnovers, up from earlier VAT limits of Rs 5-10 lakh. They might choose tax exemption windows under GST, however, the greater showing of turnover will reflect in the growth of accounted GDP.
2. Small-scale units, availing exemption up to turnover of Rs 1.5 crore, may prefer to bifurcate their business in even smaller units to get the benefit of GST exemption (units up to the turnover of Rs 20 lakh and Rs 75 lakh) scheme. This will increase the number of SSI units and add to GDP.
3. Post GST, better GDP numbers, and improved revenues are likely to reduce the pain of the failure of demonetisation. While the economics of GST is intact, the politics of the reform is shaky. A short tour to nearby trading and industrial zones is enough to sense the political backlash GST may bring in.
Political dampener
1. GST is unfriendly to the informal trading and manufacturing sector — the largest job provider for India's unskilled and semi-skilled demography.
2. GST has already started squeezing the small firms. The provision to collect and pay tax on behalf of unregistered vendors and suppliers under the reverse charge mechanism (RCM) is forcing big companies to prune their vendors' list and creating in-house capacities for ancillary work.
3. GST inspires big companies to establish nationwide supply chains and distribution networks. It is a bad news for India's local brands and the unbranded sector, which provides jobs and cheaper supplies to the local economy.
4. Under GST-driven disruption, SMEs in the informal sector will have to encounter the challenge of the rise of automation in India’s factories. The surge in automation is a global phenomenon; however, the impact will be felt most acutely in a labour-rich country like India which has missed the bus of the successful labour-intensive manufacturing sector.
5. In October 2016, the World Bank president had said that the 69 per cent of the jobs in India will be automated or mechanised over the next 20 years. As technology streamlines routine tasks, middle-skill jobs like clerical and machine operators will decline.
6. Over the next two years, GST may lead to widespread closure or scaling back of companies in the informal sector as they lose the cost-advantage derived from exemptions and tax evasion.
This may lead to a surge in unemployment in the informal sector, trade and low technology manufacturing.
7. GST-led contraction of the gray market may hit overall price lines and some sections of the society will feel the pinch, especially in rural areas. Inflation may become stingier in local economies, while top-line data may show that it is under control.
In a nation where every year 10 million youngsters enter the labour force, in spite of his huge popularity, it won't be easy for Prime Minister Narendra Modi to handle the demographic backlash of joblessness.
GST spells crisis for India's young demography and may thus cost Modi government electorally.
Unlike demonetisation, though, economically it will be a “successful” reform.