In this year of the pandemic of coronavirus, the world’s economic activity has been halted for a brief period and it broke the linkages of globalized trade which has impacted every countries’ economic growth. In the financial year of 2020-21, the majority of developed countries and emerging economies have reported negative economic growth. Which has been worse than the 2008 crisis. 

In India, it has been reported that the GDP growth rate in Q1 of the financial year 2020-21 has fallen by 23.9% compared to the same Q1 of financial year 2019-20. If compared with the other countries, this is worse than in European countries. One of the reasons may be that India had imposed one of the most stringent lockdowns in the world according to Oxford which was something unpredictable for a country with over 1 billion people. And due to this lockdown, economic activity came to a standstill which gave rise to its second problem, which was GST revenue. In the first quarter of the financial year 2020-21, GST revenue had fallen by 41%.

Both problems are closely linked to each other and how both of them from COVID have created the crisis in India will be explained in this article.

Economic decline

The release of Q1 GDP growth for the financial year 2020-21 stated that there was a decline of GDP by 23.9% compared to the previous year’s Q1. The only sector which has seen positive growth is in agricultural sector which had reported 3.4% growth, better than previous year’s Q1 which recorded 3%. The worst sectors are construction and non-financial service sectors which have reported -50.3% and -47% respectively. Whereas the manufacturing sector witnessed a 39.3% decline in growth.

The nationwide lockdown which was imposed on 25 March 2020 till 31 May 2020, halted the majority of economic activity in one night and had caused a great disturbance. Barring essential services, all others were unable to work normally. After which employees had no work, and businesses were witnessing lower orders leading to a decrease in incomes for every citizen. Unlike the 2008 crisis which was caused due to failure of financial institutions and limited countries had faced effectively, this crisis is from the pandemic which has covered almost the world. The lockdown, which was seen necessary to control the pandemic caused a disturbance in the supply chain of goods and services which further affected the income of people.

In this lockdown, many people had to face problems with no or less income. Workers had stopped receiving wages, employed people were facing salary cuts, self-employed people didn’t get new orders. This all leads to a decrease in income for households which further reduced their consumption. 

Source – https://livemint.com

In the above photo from the article of Mint in April describes the consumption behavior across all classes based on their occupation. In this picture, casual labour in both rural and urban areas are going to be affected the most, and overall, the poorest families had to suffer from this lockdown. The reason for the casual labours to be affected the most is because of no employment that has stopped the income for them. Now with no income, these people will shift to poverty which can affect India’s growth. After casual labour, it is salaried and self-employed families which will be affected by COVID lockdown. Although they would be less affected than casual labour, they are still at risk due to chances of salary cuts and a decrease in turnovers.

Moreover, household expenditure contributes around 60% of total GDP. This is an important point which the government needs to see to revive the economy. They need to make policies in the favour of household expenditure which will help in increasing their consumption and increasing economic growth.

After 2 months of strict lockdown, the central government had started to unlock the country from June but in a phased manner. This has made relief for firms to normalize its functioning but still, it has not normalized to its previous levels. Some manufacturing facilities are not working in its full capacity. One of the reasons is the hindrance in inter-state transportation and another is the absence of migrant workers who left their place of work and moved to their native places which are far away.

In this period of lockdown, the change in consumption patterns is also one of the reasons for the decline in GDP growth. With the decrease in income, people are spending on essential needs and are avoiding non-essential consumption. Although restaurants and malls have opened, people are avoiding going there and they are preferring to spend only on those things which they need the most. Today, many things such as marriage functions, amusement parks, theatres, transport have still not opened and opened, it is still limited.

This can be seen in the consumption of fuel in India, in August 2020, fuel consumption has seen a decrease of 16% compared to the previous month. In diesel, the main indicator of economic activity, decreased by 12%, from the previous increase by 5% in July.

GST Revenue fall

Due to the lockdown and economic decline. India has to face another problem which is a fall in GST revenue. In the first Quarter of the financial year 2020-21, the GST revenue has fallen by 41% to ₹1.54 lakh crore compared to ₹3.14 lakh in the previous year. Although Monthly GST revenue has improved from June onwards, compared with its previous year’s revenue, it has reduced. But the point which should be noted id that the firms having an annual turnover of fewer than ₹5 crores is getting relaxation to file GST returns till September 2020.

Source – http://gstcouncil.gov.in

The problem with the reduced revenue has caused a deficit in both state and central’s balance sheet. They are facing a scarcity of funds to fight against pandemic and expenditure on health and other social expenditures. The situation has so much worsened that the states have to adopt austerity measures. So, the finance ministry had proposed credit schemes for states to borrow for meeting their deficits.

In the first option, the Central government will provide a loan of ₹97000 crores through RBI special window. This option only takes into account shortfall due to GST implementation. This loan will not be considered in the state debt and can be repaid from the compensation cess fund. The central government will also pay for the yield up to 0.5% through subsidy if the cost of borrowing goes higher than the G-sec yield.

In the second option, the states will get a loan of ₹2.35 lakh crore (including ₹97000 crores from option 1) by borrowing from the market through the help of the Central government and RBI. This borrowing considers both the shortfall from GST implementation and the impact of COVID lockdown. But, this borrowing (2.35 lakh crore – 97000 crore = 1.38 lakh crore) will be considered in their respective state’s debt. 13 states have opted for option 1 whereas, only 1 state (Manipur) has opted option 2.

With GST falling, state and central government have resort to those items which are not under GST and both of them have autonomous power to impose Excise duty on them. These items are fuels and liquor. So, for a brief time, some states imposed a special COVID tax on liquor. While most of the states increased VAT and the central government increased excise duty on the sale of fuel, which stabilized the price of petrol and diesel even though the price of crude oil had decreased.

Now let’s see the breakup of GST revenue by slabs. There are 5 GST rate slabs and the items Under it are as follows:

Source – https://timesofindia.indiatimes.com

The majority of items are in 18% slab followed by 288 items under 5% slab. Now, how much revenues come from these slabs; it is given in the chart below:

Source – https://www.alphainvesco.com

18% GST slab contributes nearly 60% of total GST revenues. Now under 18% slab, the items include petroleum products, services in hotels & restaurants, and metal items. In the 12% GST slab, the items included are FMCG and agro-based items. And white goods in 28% GST. So, in April 2020 when the GST revenue had fallen by 72%, the main reason was a decrease in e-way bills and providing moratorium to small businesses till September.

Due to the closure of hotels, amusement parks, theatres, and people not spending on white goods which comes mainly under 18% and 28% slab, GST revenue is going be lower than the previous year in the coming months.

Government response

Central and state governments started to unlock the country in a phased manner starting from June to restart its economy. During the lockdown, the central government in May 2020 announced a ₹20 lakh crore stimulus package that focused on land, Labour, Liquidity and Laws. This package mainly focused on rural, labours, MSMEs and working-class people. For MSMEs, the definition was revised and the collateral-free loan is going to be provided. Global companies will be barred from participating in government tenders upto ₹200 crores. For employees, contribution to EPF has reduced from 12% to 10%. For migrant labours and poor families, free rations, rental accommodation under PM Awaas Yojna and loans to street vendors will be given.

Recently the government will give half a salary to those people who lost their jobs in the COVID pandemic and lockdown. An estimated 40 million people will benefit from this scheme but it will be for those who have a monthly salary up to ₹21000 and who are under ESIC (Employees’ State Insurance Corporation).

For migrant and rural workers, the central government launched “Garib Kalyan Rozgar Abhiyaan”, similar to MNREGA, which is implemented in states where migrant labours have returned, mainly in BIMARUO states. This will provide labour jobs for migrants who have come back to their native places in infrastructure projects and rural development schemes. This will help the government to complete their pending projects and the beneficiaries will get income to sustain themselves. 

By providing these relief plans, the government needs to check their debt levels and avoid cross the limit of thresholds to avoid country to go in debt crisis.

Looking forward

Although the government has started to unlock its economy in a phased manner, it is still not enough because India still has stringent lockdown according to Oxford. Transportation such as railways is still not running to its full potential. This can be seen in diesel consumption in the august month which has decreased by 14% compared to the previous month.

With announcing unlocks, the central government has transferred power to states or declaring lockdowns in their respective states. This is a bad idea because if some states impose lockdown every now and then which is still happening, it will impact in the production cycles of factories and supply chain which will cause disturbance in working capital and expenditure on restarting the factories. This is happening in some states where they impose weekend lockdown, week lockdown and weekday lockdown which is causing big impact in normal functioning of state economy.

With the rural economy thriving during the pandemic, India’s economic downturn may revive in the coming months but time will say. As rural areas are more responsive in the unlocking phase, it is solving unemployment problems as people have started working in the new sowing season and participating in government employment schemes.

In urban areas, some of the things have still not opened such as theatres, amusement parks, and other mass gathering places in the time when festive seasons are coming which will likely remain the same. With these ongoing restrictions, the coming months which is an important period for India due to the number of festivals will go dull. People are still restricting their spending on un-necessary things mostly white goods and spending on those things which are necessary.

With this type of situation currently prevailing in the country, the GDP growth in the next quarter will be better than its previous quarter but it will be worse than the previous year’s same quarter. And overall GDP growth in this financial year 2020-21 will be negative. The sector which will affect most in this situation will be the service sector. Similarly, in GST revenue collection, it will improve compared to the previous month but is will be worse when compared with the previous year’s same month. With this, the government’s fiscal deficit will widen. Until the vaccine for COVID-19 doesn’t come, people will not freely move around and spend on other things which is essential for the economy to grow.

The Solution

One of the solutions for reviving the economy is to make policies for the rural economy first. As urban areas are prone to pandemic due to high population density, the government needs to start the rural economy first for time being as they are less prone to the pandemic and can be easily restarted. Moreover, pending infrastructure projects due to the absence of migrant workers can be replaced my nearby local people to complete the projects which will help local people to earn income and restart the economy. Moreover, providing agricultural infrastructures such as water supply, cold storage, and warehouses can increase efficiency and reduce economic losses for rural people. Rural areas will be prosperous with these policies which will make them self-sufficient and also reduce migration which will further reduce pressure on urban infrastructure. As rural migrant workers may be reluctant to go back to work in other places, the government should provide permanent employment opportunities to these people by promoting rural and cottage industries. If the rural economy is in good condition, most of India’s economic problems will be solved as 65% of the total population in India lives in rural areas.

Other solution is to redefine GST slabs. Current average of tax rate is lower than the tax rate which was prevailing before implementation of GST. Current average weighted tax rate is 11.6% compared to 16% before GST as mentioned by RBI. The tax slabs should be reduced and tax rate on some goods and service should be change in order to reduce complications and increasing the revenues. Other than GST, state governments should avoid imposing temporary lockdowns now and then. This will help in smooth functioning of activity and firms wont have to bear the loss in shut-downs.

Another solution for solving these problems is to promote MSMEs. MSMEs, if supported by government policies can be a strong backbone for India’s Economy. MSMEs in India is the second-largest employer employing 124 million people according to CII. This can help in reducing income inequalities and increasing middle-class households by encouraging entrepreneurship. It can also generate employment easier than other policies. Moreover, they contribute to 45% of India’s total exports. MSMEs can be of great help for the Aatmanirbhar Bharat mission as they can easily set up to make indigenous products. Also, if there is a healthy MSMEs, it can be a strong forward linkage to other companies therefore making smooth economic growth. For that government needs to streamline finance, regulations, and special clusters for these industries.

Author

Siddharth Dholaria
Volunteer
M. Sc. Finance
NMIMS, Mumbai
Batch of 2019-21
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