Covid-19, is it really the misfortune of our lives or the divine intervention the Indian economy needed?
A pandemic has caused so much panic it brought everything down to it’s knees. However, the economy wasn’t just brought down to it’s knees, it scrapped it’s knee, broke it’s ankle and fell off grid.
Let’s hash out the details.
Indian Economy shrank by 23.9% in the April-June quarter, much worse than the predicted 18.9%. It kept shrinking and is the biggest contraction recorded and worst hit in the G20 countries.
The unemployment levels have hit an all-time high of 23.5% in April, 2020.
To begin with the economic weather of India wasn’t off to a great start from the beginning of the pandemic resultant lockdown. What is it about the elected government and playing a blame game? First, Nehru, then Millennials, now, straight up God. But taking accountability has never been a strong point of this elected government.
Nirmala Sitharaman is the first full time female Finance Minister. Unfortunately, the societal standards don’t let women to be in positions of authority and when they do rise up through the ranks, one small error would make the people come down on them faster than you could say finance.
It was in the 41st meeting of the GST Council that it went all haywire. On the 27th of August, 2020, Sitharaman saw an opportunity to defend the diabolical decision called GST that was introduced in 2017. The one nation one tax idea really did not help anybody and the pandemic put it in spotlight for causing the chaos it did.
The Honorable Finance Minister, said, “This year we are facing an extraordinary situation that even below 10 percent approximate estimation you are facing an ‘Act of God’ which may even result in a contraction of the economy…”
“May” is an understatement.
The overall compensation for the states was estimated to be ? 3 lakh crores. Unfortunately, the collection cess has only amounted to ?65,000 crore and there is a whopping shortfall of ?2.35 lakh crore. Of this ?2.35 lakh crore, ?97,000 crore compensation requirement is due to GST roll-out and the remaining is on account of the impact of COVID-19 on the economy.
The next question that naturally arises is what did the Center decide on doing for the states, to meet this shortfall?
Well, they were given two options from which the state governments can choose what is convenient for them.
Option one is where the center will facilitate the state ?97,000 crore as borrowings through the RBI as a special window. This would be repaid after 5 years with a reasonable rate of interest.
Option two would be where the states can borrow ?2,35,000 crore from the market, facilitated by the Centre and RBI.
It was like they depended on the states for the GST to be passed but when in time of need by the states they are washing away responsibility in the last minute. Well prayed, right?
The States were given seven working days to take a call. What is to be kept in mind is the fact that the states will have to take a call whether they could shoulder a debt burden now, during this raging pandemic or later when everything would be uncertain? When supply of resources are already less in count, the next few decisions have to be taken with utmost caution.
At least 21 states Andhra Pradesh, Arunachal Pradesh, Nagaland, Mizoram, Manipur Assam, Bihar etc. have decided on option one and borrow ?97,000 crore.
Manipur had decided on option two and then changed it to option one.
However, most opposition led states or states where BJP isn’t at majority like Jharkhand, Kerala, Telangana, West Bengal have rejected both options and have sought out to the intervention of the Prime Minister.
“If the other states do not submit their options before the due GST Council meet, then they will have to wait till June 2022 to get their compensation dues subject to the condition that the GST Council extends the cess collection period beyond 2022,” an official said.
All we can do is wait and watch how this government would leave all the burden of poor decisions on the next elected government. If they come back to power like most monopoly of powers, the ghosts of economy pasts will come back to haunt them in a terrible way.
There’s always a question on some people’s mind, that had the pandemic not have happened, would there be a possibility of having a good and stable economy?
To answer that, highly unlikely, because the higher we peak, the farther we fall. That’s not my philosophy, that’s just how the business cycle works. The question would’ve been as to when and not why.
To conclude, what can the government do to do better Now? Should they support their states to in turn get future support? Should they go ahead and leave it up to them on how they choose to fill their debts? How much longer can responsibility be avoided?
Written by- Annapurna Pillutla
Sources: Images & Statics: tradingeconomics.com