By Madan Sabnavis
The buoyancy in GST collections in the final handful of months has brought anticipated cheer as it does indicate that there will be some compensation for the shortfall witnessed in earlier months. There is optimism that larger GST collections also reflect an imminent recovery that has been witnessed in the economy. As the thumb rule of 3 successive months of a phenomenon has been observed with respect to GST collections, this is a logical conclusion that could be drawn.
The GST target has been about Rs 1 lakh crore per month and for the 1st nine months of the year has summed to Rs 7.8 lakh crore. For the 1st six months, it was Rs 4.54 lakh crore, and therefore there was a shortfall of Rs 1.4 lakh crore. Subsequently, collections have crossed Rs 1 lakh crore in every of the months and brought in Rs 3.25 lakh crore. There has, therefore, been some compensation for the loss in the 1st six months. There is cause to think that if this trend persists, the deficit in collections can be additional truncated and the final shortfall would be in the area of Rs 80,000 crore to Rs 1 lakh crore. Given the quite slow get started, this will be an achievement.
Let us appear at the package per se. There have been liquidity-infusing measures of RBI, cost-free meals getting provided to the poor, improve in the MGNREGA wage and payouts, credit guarantees to numerous segments, improve in capex of the government, advances to staff for spending, and so on. Intuitively, all these measures must be top to larger spending, which was the principal objective of a stimulus and would automatically create income for the government in the kind of GST collections.
RBI came up with LTRO/TLTRO and so forth which meant providing more loans to banks, which then could be targeted to precise sectors. These loans must have ideally been used to invest in goods and services which includes machinery for investment or working capital. The similar need to hold in case of loan guarantees getting provided or partial credit enhancement getting extended, exactly where beneficiaries use the funding to invest in goods, which, in turn, must lead to demand for numerous items. Any such spending must create a GST invoice and the government must have received an typical 12% return on such spending.
There has been a lot of spending on agriculture in the kind of direct subsidy on fertilisers or for numerous farm-associated schemes. The Rs 2 lakh crore of help on Kisan Credit Card must also ideally lead to spending on items that give the government a return in the kind of GST. The price for fertilisers was lowered by 7% (from 12% to 5%), and therefore the more Rs 65,000 crore must yield at least Rs 3,250 crore as a reverse payment to the government.
There have been other schemes announced, like the Production-Linked Incentive (PLI) for Rs 1.5 lakh crore more than 5 years.
If a proportionate quantity of Rs 30,000 crore gets expended this year, it must bring in an more Rs 3,600 crore as GST income. The similar holds for the Pradhan Mantri Awas Yojana. Advances provided to staff of even cashing of LTC which was to be spent must have provided a minimum GST income to the government. The employment scheme (Pradhan Mantri Rojgar Protsahan Yojana) involving Rs 8,300 crore would have generated new jobs and engendered a fresh round of spending. Putting all these pieces with each other, there is cause to think that if the stimulus worked the way it must have, the GST income would have also elevated, even though not in a commensurate manner.
There is, having said that, some irony right here, which could raise more concerns than are answered. The government has spoken of a Rs 30 lakh crore of stimulus programme, which comes in numerous types. In reality, a huge aspect of this quantity was supposed to be induced in the existing economic year. When the Atmanirbhar Bharat 3. was announced in November, the presentation showed the progress produced on every of the announcements produced in May, which was quite encouraging. For instance, Kisan Credit Cards with credit limits of Rs 1.43 lakh crore had been offered and street vendors got loans worth Rs 1,373 crore. Hence, even the smaller sized schemes have been on track.
The conundrum becomes stark if the numbers are place in viewpoint. A huge aspect of the stimulus was in the kind of credit enablement, which could be place at about Rs 17-18 lakh crore in the May package. Here, RBI fulfilled by means of LTROs and OMOs, but all the funds that moved about have not fairly translated into a commensurate improve in true production and have revolved among banks and institutions. Even the Emergency Credit Line Guarantee Scheme had spoken of credit to the extent of Rs 2 lakh crore getting sanctioned ahead of it was extended to non-SMEs in November. Here, it appears like the funds have essentially been utilised for repaying pricey debt with the advantage of decrease interest price and assure from the government.
The reality that LTROs have been practically repaid by the bank indicates that most of the bank liquidity measures have been repaid or are getting reinvested in the reverse repo window. Thus, when such liquidity infusion has helped for certain to maintain prices low without the need of cutting interest prices, they have not led to improve in production. In a way, this turned out to be an unintended consequence of the liquidity infusion programme exactly where other things like willingness to lend by banks have been restricted and enterprises specially in the SME segment have been not operating at affordable capacity to invest more capital.
The message, genuinely, is twofold. The 1st is that with the package of Rs 30 lakh crore getting implemented—maybe more than a period of time—if the funds do get translated into physical goods and services, there has to be a reverse flow of income to the government in the kind of GST. Even rudimentary MGNREGA wage that is paid must be partly spent on GST liable goods and yield income to the government. Hence, Rs 30 lakh crore must at the limit yield Rs 3.6 lakh crore assuming typical tax price of 12%. This must flow more than a period of 2-3 years, even even though the finance minister had spoken of most these schemes getting successful in the existing year.
The second believed right here is that primarily based on what has been observed so far, it does seem there have been quite a few deviations with the stimulus finding converted from ‘spending’ to ‘supporting for sustenance’. Hence, handy credit has been channelled more towards repayments and income earned by means of direct intervention of the government has been spent more on consumption of necessities rather than income earning goods and services. This has upset calculations to a huge extent.
Hence, it can be mentioned that the stimulus was effectively conceived in terms of scope and covered enablers of development with direct intervention with the former getting more dominant. It worked on the theory that such incentives would allow larger production by enterprises and to the extent that people benefited from the measures would spur consumption. This must ideally have led to larger consumption and investment. For this to work, a lot was dependent on how the financial players reacted to the incentives offered. It does seem that the response was more towards safeguarding their interests rather than spending, which could have accelerated the development method. As a corollary, the continuation in the meeting of the GST target in the subsequent 3 months would nonetheless be partly due to the stimulus offered by the government.
(The author is chief economist, CARE Ratings, and the author of ‘Hits & Misses: The Indian Banking Story’. Views are private)