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Section : Economics
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Legacy of the Past: A Complex Economic Puzzle
 
operational issues after the launch of GST are proving to be major irritants to the indirect tax payers.

By B.N.V. PARTHASARATHI




I partly differ with Mr. P. Chidambaram’s views in his article – ‘Across the aisle: Clueless in New Delhi’, written in The Indian Express on 17th September, 2017. The credit flow is impacted mainly due to the mounting NPAs of the banks which is a legacy bequeathed by the UPA government.

This is majorly on account of cost and time over runs in mega infra projects and bottlenecks in coal allotment and the reasons are obvious. Delays in implementation of major infrastructure projects has led to Rs. 524.45 billion (bn)  escalation in their original cost estimates from Rs.1452.71 bn to Rs.1977.16 bn as on 31st May 2012. And this legacy continues as under.

Cost escalation in central infrastructure projects (projects costing Rs. 1500 million and above)

Period Total No. of Projects No. of stalled projects Original cost (INR) Revised estimates (INR) Net increase in cost (INR) Percentage of upward revision
30th August, 2014 720 295 5488 bn 6053 bn 1015 bn 18.5%
31stDecember, 2014 738 315 9776 bn 11848 bn 2072 bn 21%
31 st December, 2016 1186 287 14600 bn 16264 bn 1664 bn 11.39%

(Source: Ministry of Statistics and Programme Implementation.)

Yes, the implementation of demonetisation and GST were done in a hurry and the Government has certainly put the cart before the horse. These measures are the efforts of the government in integrating the informal economy with formal economy which involves structural adjustments, and in the transition period the economy is bound to slow down.

The government has stated that 91 lakh people have been added to the direct tax net post demonetization. As the GST revenue collections in its first month (Rs. 92,283 Crores in July, 2017) indicate, the new GST regime could be at least revenue neutral, if not revenue enhancing, in the fiscal 2017-18.

Net direct tax collections grew by 17.5 percent to Rs.2.24 lakh crores during April-August, 2017. This is 22.9 percent of the budget estimates of direct taxes for the total financial year 2017-18, according to the finance ministry. Hence, the overall tax collections are expected to be higher in 2017-18 compared to the previous year.

Therefore, terming demonetization as a misadventure is not correct if one looks at the long term impact in expansion of the tax base and expected tax revenue accruals. The economic survey says the number of taxpayers increased 45 per cent in 2016-17 as an effect of demonetisation, compared to 25 per cent rise in the previous year.

The statement of Mr. P. Chidambaram, ” GST, a good idea, was translated into a flawed law that suffered from bad and hurried implementation, and affected many industries in the manufacturing sector” is valid only in the short term scenario during the transition phase. It is a flawed law because it needed the consensus of all the states and each state has its own unique problems in tax collections and not to mention about their state fiscal deficits.

We had to ‘hurry’ in implementation of GST because the 16 year long wait for a tax reform measure is unreasonable by any standards. Such a massive tax reform measure when introduced across the country is bound to have teething problems. However, I agree that the operational issues after the launch of GST are proving to be major irritants to the indirect tax payers.

Nevertheless, going by the trend of the GST collections during the fiscal 2017-18, the first year will certainly be revenue neutral and likely to yield higher revenues in the coming years. The issues with regard to tax slabs for various goods and services and the items currently not covered under GST like petroleum products, alcohol and electricity will be resolved over a period of time once the states are in a position to clearly assess the impact of GST on their state revenue collections.

However, the fact remains, as Mr. P. Chidambaram says, the government appears to be clueless in finding the causes for the slowdown of the economy which obviously leads to unemployment concerns. In my view the causes could be – stalled and delayed mega projects, mounting NPAs and credit aversion by banks – a vicious cycle, a bit difficult to break and its obvious outcome is unemployment.

Earlier we had and still continue to have one vicious cycle in rural economy- poverty, illiteracy and ill health – and thanks to the policy paralysis during the last ten years we have succeeded in now adding one more vicious cycle in urban economy as mentioned above.

To break this vicious cycle we need to kick start the economy by infusing activity in stalled and delayed mega projects. As a first step, policy measures are needed from the government to remove the hurdles and effective co-ordination between the concerned government ministries/ departments or agencies.

The PMG (Project Monitoring Group) was  set up in January 2013 as a secretariat to the cabinet committee on investments to resolve the pending issues and to track the progress of projects of the size of Rs.10 bn and above in both public and private sector. The PMG should also include members from the Industry, RBI / Banks and the concerned Central / State Government agency so that all major stake holders of the projects are taken into confidence and the accountability is fixed with regard to stalled and delayed mega projects.

The second step is a one-time major relaxation of the NPA norms by the RBI so that this will enable the banks to lend afresh to revive the stalled and delayed mega projects. The NPA Ordinance passed in May 2017 gives greater powers to RBI in swiftly dealing with the NPAs of the banks.

12 large NPA accounts constituting 25% of the stressed accounts identified for resolution under the Insolvency and Bankruptcy Code are likely to be resolved in a time frame of 270 days. However, these 12 NPAs once fully liquidated may impact the bottom line of the lending bankers leading to capital adequacy issues.

When these two measures are done in tandem, employment will pick up in the industrial and infrastructural sectors significantly as these measures are expected to revive the economy.

Simultaneously, the government should take steps to infuse additional capital by either pumping in more equity or the banks should raise additional equity from the capital markets. Weak balance sheets may not fetch banks the desired premium while raising funds through capital markets. Therefore, the government will have no choice but to pump in additional equity in the near future. In view of this back ground, the efforts of the government to disinvest its stake in public sector banks also may not be successful.

Of course, the economic activity will pickup in 2018 since the government will spend more keeping in view the ensuing elect

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