Inflation in India has hit its lowest level in recent decades. At 1/54% in June, primarily due to a dip in prices of food and dairy products, it is at its lowest level since 1999. That is certainly good news for the consumer at the ground level. With the inflation beast tamed, the government now needs to focus on triggering the stagnant private sector investment, to push India’s growth. Simple economics says that if money is cheap ie. the interest rates are low, then corporates are willing to borrow and invest in new projects. The cost of funds is certainly a key determinant of the demand for loans. With fresh bank loan sanctions at a 60 year low and new private sector investment at a 25 year low, India needs to bring down its interest rates, which are unattractive to borrowers. In today’s extremely competitive times, when profits are not easy to earn, the present average interest rate of 11% is not quite attractive. High interest rates means few borrowers for banks, which impacts their profits by compelling them to park their funds in low interest government bonds. The inflation focused RBI on its part has been reluctant to bring down interest rates, since that fuels inflation. The government and the RBI are thus on the opposite sides of the table in the matter of interest rates. While the government wants low interest rates, so that the GDP growth surges, the RBI is reluctant to do so, since low interest rates spur inflation. With the record low inflation in June, the government CEA has already built pressure on the RBI, saying that it cannot miss a growth opportunity in such times ie. it must prune interest rates. Monetary policy, which includes the fixation of interest rates, is under the sole control of the RBI. The government has little say in it and can only plead. The RBI must maintain its autonomy, must not be pressurised by the government and must take a considered decision. While the RBI is yet to give any indication of its forthcoming policy stance on interest rates, a marginal cut of 25 basis points looks imminent. A higher interest rate cut in the immediate future is unlikely, since the RBI forecasts that inflation is bound to raise its ugly head in the second half of FY 2017/18 and will thus prefer caution in the matter. A rate cut would mean further cheer in India’s booming stock markets.
With the politically sensitive Gujarat elections looming on the horizon and the detractors like Yeshwant Sinha giving ammo to the Opposition to target the government, in the wake of a fall in the GDP growth, in addition to the PM’s aggressive defence of his performance on the economic front, it was imperative to modify the GST, to set right the glitches and errors visible due to the hundred days of its implementation. It was time to recognise the ground level experience of three months of GST, which revealed its errors and pain points. These included a need to rationalise the GST rates and the apparent inconsistencies therein, to reduce the burden of compliance on the small enterprises, to bail out exporters whose massive refunds were stuck in the system, to grant input credit to the manufacturers and to dispel the lingering fear of opening of past records, in the case of those who joined the tax regime for the first time. In a timely move the national GST Council in its twenty second meeting has recognised these difficulties and in order to provide immediate interim relief, has modified the GST regulations, It however cannot be denied that the changes reflect the ruling party’s anxiety over the forthcoming Gujarat elections, having provided relief to the textile, jewellery and food items segment, the mainstays of the Gujarat society/economy. In a much needed relief, the small businessmen who were facing problems in filing monthly GST returns, have now been permitted to do so on a quarterly basis. The threshold of the composition scheme which gives relief to the small tax payers, has been increased from Rs.75 lacs to Rs.1 crore and the reverse charge mechanism has been deferred till March 31, 2018. The massive pending tax refunds of the exporters, which had blocked thousands of crores and was obstructing their business, will be cleared in the next two weeks. A marginal GST of 0.10% will be levied on merchant exporters until March 31, 2018 and will be reviewed thereafter. In order to mitigate the blocking of funds of exporters, an E wallet facility will be available to them from April 1, 2018. While the GST rates have been reduced on 27 items, yet in order to avoid any adhoc changes in the GST rates, it has been decided to set up a committee to frame the principles to reduce rates, depending upon the emerging GST patterns. The changes in the GST are welcome and are expected to set a trend of such amendments, based on the overall picture of GST and its administration/compliance that will emerge in the coming years. The difficulties that a producer/consumer may face due to any irrationalities in the law must be removed at the earliest. Moreover the transition pain caused by the onset of the GST too will be mitigated if the changes are timely and rational, without the temptation of any political agenda therein.
India’s most disruptive and transformative tax reform since independence, which promises to make Bharat, a ‘one tax, one market, one nation’, has finally seen the light of the day, after a controversy ridden midnight session to roll it out. An effort to have a uniform tax law in 29 states and 11 union territories and to abolish/subsume numerous decades old laws therein, is a gigantic task indeed. The enormity is best displayed by the fact that India generates over 350 crores invoices each year, which will now be the subject matter of GST uniformity of rates, legislation and regulation. It has dawned after over fifteen years of the GST law in the making, by build up of consensus among disparate political parties and diverse sections of society. Stitching together a diverse polity from Mumbai to Manipur and Leh to Laksadweep is not an easy task, particularly where these regions have been administering their own tax laws since decades. While the start of the effort may have been seeded in contentious and fractious politics, the end was not, as is evident from the eighteen meetings of the national GST Council, where every decision was driven by consensus and needed no voting thereon. While the government has sought to enact a simple law and the devil may not be in the details, but it certainly will be in its implementation and the transitory phase. But the transition phase of emerging from one law into another, ushers in a huge change and is bound to be painful. The government focus should be to reduce this period of painful transition to the minimum and to mitigate the losses/hardship of the small entrepreneur, who are the most ill equipped to implement the change and have the most to lose. The GST law will certainly reduce the ‘cash/black’ sector of our economy, which chooses to operate below the radar and evades an entire range of taxes, both direct and indirect. It will reduce the pain of compliance with multiple tax laws in numerous states and ensure a pan India seamless movement of goods. The GDP is bound to go up, due to the removal of irritants/barriers to trade. But that would be visible only about two years from now. Till then the country needs to bear and endure the pangs of transition, particularly mindful and sensitive to the hardship to the small entrepreneur.
The onset of the GST on July 1, may be sad and sombre day for the thousands of octroi agents, touts and their ilk, (who have been rendered jobless), operating at the octroi nakas of Mumbai, where every goods vehicle that entered Mumbai was forced to pay a bribe, but for all others, it is a day to rejoice. Together with the BMC officials posted at these octroi checkposts, they made life miserable for the traders/businessmen, not just by the bribes they extorted, but moreso by the delays they inflicted on the smooth movement of goods. Even if all the papers of the goods vehicle were in order, the rigours of bribe or else harassment was a must. Octroi netted an annual revenue of Rs.7200 crores for the BMC, but with an average waiting period of 3-5 hours per truck, the traffic jam/pollution it caused and the corruption it infested, it meant a much bigger loss to the city’s business community. It was a collective mafia at the octroi checkposts, which made operations difficult for the traders and transporters. With the State Government agreeing to compensate the BMC, for its loss caused due to the abolition of octroi, which has been subsumed into the GST, the same stands terminated. With an unobstructed movement of goods, the traders and transporters who have been tormented by octroi, since its levy in 1965, are an elated lot. The irritating extortion and delays at the entry points of the city are finally consigned to history. With the dismantling of the octroi checkposts, there certainly is a considerable improvement in the ease of doing business in Mumbai. It is unfortunate that the BMC ignored the larger interests of the city and continued with this regressive tax for decades. It led to the relocation of many businesses out of the octroi limits of Mumbai, but the BMC cared little. This eroded its pre-eminence as India’s commercial capital, which is incidentally enjoyed by Delhi today, but the BMC, which is more keen to pander to the interests of the street mafia was indifferent to it. The octroi agents/touts maybe downcast now, but so were the city’s trader/transporters for decades.