Worst economic crash in years may aid Centre in GST row

India may have had the worst GDP contraction in years, but the economy numbers actually strengthen the Centre’s hands in the GST compensation row with states

The 23.9 percent contraction in Indian GDP for the first quarter of FY21 offers two pointers for the economy. First, the shock from the first phase of the lockdown was deeper than what most estimates had pencilled in. This means the second phase of the lockdown, though sporadic will also extract a deep cut in the second-quarter data. The second pointer is that the Centre shall now be in a stronger position to negotiate with the states on GST compensation.

The first pointer is intuitively obvious and so we shall not spend space on it here. The second one throws up some interesting possibilities.

The states have so far argued their revenue has got shattered thanks to Covid-19-induced slowdown in their economies. Some have also taken this opportunity to argue that the entire GST architecture is itself flawed and asked for a return to the previous indirect tax structure, an obvious bargaining tactic.

For the Centre, the GDP data released on Monday is therefore most useful, simply from this perspective. That it will now have to lay out ameliorative strategies to ensure the economy does not suffer a deeper Covid-19 shock is a different perspective altogether.

It can now argue that the cataclysmic dip in the performance of the economy is the clinching evidence to prove that tax collections are going to undershoot every budget target, with or without cess. In the circumstances whatever the Centre can muster is about the best the states should expect to make do with. Remember some of the Opposition-ruled states have threatened to make the issue of Centre reneging on a 14 percent compensation akin to a violation of the Constitution and have decided to move the Supreme Court. (In the GST law, the Centre has agreed to a Constitutional provision that state revenues must grow at 14 percent per annum, else the Centre will make good the difference).

Centre’s position strengthened

Even if for the sake of argument the states can prove that there has indeed been a violation of a Constitutional provision, the bleak GDP data will make it most difficult for the Court to pass any strictures against the Centre. The Centre’s legal officers can now argue that there is no space for raising additional resources without further hurting the economy. They shall be able to demonstrate that if the Centre were to borrow the additional sum on its own balance sheet, it will have a strong adverse impact on the debt market. The implication is that the price of the GOI papers would drop (more borrowing means cheaper papers) which would in turn seriously hurt the pricing of the papers of companies too, both private and public. That would create even more strain which may be impossible for the economy to sustain.

Additional borrowing by the states have no such direct corollary for the Indian markets. One of the reasons is because the states come to the markets much less frequently than the Centre does. The other is that the centre has perversely kept their freedom to do so under restrictions, till recently. For instance only one state, Kerala has floated an overseas debt. So the buyers of their debt – domestic and foreign banks and financial institutions do not link their offerings to the pricing of corporate debt. In other words, there shall be no demand that if state papers are so plentiful and cheap, those of the companies should also be cheap.

It implies that even if the states are forced to commit to pay a bit more in the future to make their borrowings sail through, the risks can be adjusted against renewed growth of the economy.

Which then leaves the states with just no option except to accept the offer made by the Centre. Those are either to meet the shortfall arising out of GST implementation (calculated at Rs 97,000 crore approximately) to be borrowed by the states through concessional issue of debt under a special window to be steered by the Union Finance Ministry, or finance the entire shortfall of Rs 2.35 lakh crore (including the Covid-19-impact portion) through market borrowings by the states at whatever rates they can manage without any support from the Centre.

Actually the states are to quite some extent responsible for their present difficult fiscal position. That they are afraid their borrowing costs would be steep is true. But the costs would be high because of their (mostly) inept handling of the pandemic. By the end of May this year, most of them were chafing against the Union Home Ministry’s national-level guidelines and demanding that those be substituted with their own regulations.

After having got the freedom, several of them subsequently used the equivalent of a hammer, the indiscriminate use of lockdown, to swat the virus. The result was obvious. India is now home to over 36.21 lakh Covid-19 cases and the economy has got hit instead. A painstaking administrative effort to do micro management of the areas with large caseload, something they had accused the Centre of not being capable of doing, was rarely used. It is not surprising that the Centre has again taken away the freedom of the states to announce general lockdowns in its latest Unlock 4 guidelines.

The Covid-19 bill has added about Rs 51,400 crore to the expenses of the 14 most-affected states. Yet in the battle to share the GST tax pool to meet some of those additional costs, the GDP data has moved the political pendulum in favour of the Centre instead.

(The writer is a business journalist and can be reached at [e-mail])

Disclaimer: The views expressed above are the author’s own. They do not necessarily reflect the views of DH.