📰 Grim Sovereign Tangle
GST reforms should not fall victim to the trust deficit from the compensation stand-off
•Three years after India’s new indirect tax regime was introduced with a slogan of ‘One Nation, One Tax’, it faces an existential crisis. Despite its patchy structure with too many rates, complex compliance requirements and multiple mid-course changes, the implementation of the Goods and Services Tax (GST), overseen together by the Centre and the States, had begun to almost serve as an exemplar of co-operative federalism. All of those gains have quickly unravelled as the slowdown in the economy, exacerbated by the COVID-19 lockdowns, has thrown all revenue calculations to the wind. The Centre is obliged to pay to the States, for a period of five years, compensation for revenue shortfalls in return for their having ceded the power to levy the multiple taxes that were subsumed into the GST. Last week, Finance Minister Nirmala Sitharaman asserted, at what may have been the most tenuous GST Council meeting so far, that the Centre will not be able to meet the compensation shortfall. With GST collections sharply undershooting all targets this year, the Centre estimates compensation payable for the full year at Rs. 3-lakh crore. But just Rs. 65,000 crore is expected in the cess kitty used to pay out the compensation.
•In July, the Centre paid out the last instalment of compensation for the last fiscal and is, so far, yet to pay anything for this year. States have now been given two options, both requiring them to borrow from the market. The Centre contends that only Rs. 97,000 crore of the revenue shortfall is from implementation of the GST, while Rs. 1.38-lakh crore is due to extraordinary circumstances posed by an ‘Act of God’ (the pandemic). States can either borrow Rs. 97,000 crore, without having it added to their debt and with the principal and interest paid out from future cess collections, or they can borrow the entire Rs. 2.35-lakh crore shortfall, but will have to provide for interest payments themselves. The Finance Ministry has argued that higher borrowing by the Centre will push up interest rates and dent India’s fiscal parameters. At best, this is specious — total government debt, including States’, is what rating agencies look at. Several States have rejected both options and some, including Tamil Nadu, have urged the Centre to rethink in view of their essential and urgent spending needs to curb the pandemic and spur growth. A staring match is in the offing. It is up to the Centre to resolve this impasse in a way that future GST reforms do not fall victim to the trust deficit engendered by this stand-off, the pandemic response is strengthened and all-round government capital spending to bolster sagging demand not derailed. For now, the only certainty is that the compensation cess levied on demerit goods will stay on beyond 2022, and may even be raised, affecting several businesses, including the jobs-intensive auto sector.
The Gopalakrishnan Committee report does not adequately address governance frameworks around government data sets
•The Committee of Experts on the Non-Personal Data Governance Framework has recommended in its report, among other things, making privately held non-personal data “open”. The objective is to make such data available for general use, though the committee does lay down conditions for such data transfers. This has raised concerns about state interference in the private data ecoystem. We think that the report is a missed opportunity to address the governance frameworks around what are some of the most important non-personal data sets in a country — those created by government agencies, or those resulting from taxpayer money.
•Non-personal data are data that do not identify an individual. Nonetheless, such data can be useful in either framing public policy or creating and providing new services. For example, aggregate data from land registries can tell us a lot about land use patterns. Data related to traffic flows can be used to guide traffic management. Non-personal data are also viewed as critical for development of the AI ecosystem.
Why data should be open to citizens
•Some of the most important non-personal data sets are held by the government, or result from taxpayer funding. There are five reasons why these should be open to the citizens of the country. First, the state should be transparent about information that it has. This will improve accountability. This is one of the reasons why the Right to Information (RTI) Act, 2005, mandates the disclosure of government data on a suo moto basis. Second, if taxpayer money has funded any of the data sets, then it is an obligation of the state to return the fruits of that funding to the taxpayer. Third, by permitting the reuse of government data sets, we avoid the need for duplication. Fourth, government data sets, curated according to publicly verified standards, can lead to increased confidence in data quality and increased usage. Finally, free flow of information can have beneficial effects on society in general.
•In theory, we know that the government agrees with this proposition. Besides the RTI Act, we have in place many policies that promote and provide for openness of such data. For instance, one of the nine pillars of the Digital India Policy is “information for all”. The National Data Sharing and Accessibility Policy (NDSAP), 2012 requires all non-sensitive information held by public authorities to be made publicly accessible in machine readable formats (subject to conditions). The government has also set up an Open Government Data Platform to provide open access to data sets held by ministries and other agencies of the government. Various States have also either created their own data portals or have provided data sets to the Open Government Data Platform.
Failure to create an open data society
•In practice, the quality and quantity of data sets published by the government are still well short of ideal. In addition, the government’s general reticence to make valuable information sets available to the public is well known. There are two reasons for our failure to create an open data-based society. The first is lack of clarity in some of the provisions of the NDSAP or the relevant implementation guidelines. The second is the inability to enforce guidelines appropriately, which has meant that data sets released by governments are often inconsistent, incomplete, outdated, published in non-machine readable or inconsistent formats, include duplicates, and lack quality (or any) metadata, thereby reducing re-usability. The Gopalakrishnan Committee could have evaluated what is going wrong with existing policies and practice pertaining to government data, and deliberated on how these can be addressed. Instead, the report largely focuses on the dangers posed by data collection by private sector entities.
•Without going into the merits or demerits of taking an interventionist approach to the data ecosystem, many of the concerns that should be addressed in the report that are central to the governance of the data ecosystem have sadly remained in the background. For instance, India’s cybersecurity framework continues to be woefully inadequate, while even the Justice B.N. Srikrishna Committee report of 2018 highlighted the need to restrict the growing power of the state to carry out surveillance.
•Since data governance is a relatively new concept in India, the government would be better served in taking an incremental approach to any perceived problems. This should begin with reforming how the government itself deals with citizens’ data. This would engender greater trust in data governance practices and, importantly, allow the development of state capacity to govern the data ecosystem.
📰 A guide to flattening the curve of economic chaos
Well-thought-out policies can reverse the results of incompetence; the onus is on the Centre to spend now
•Now it is official: India has managed to become the global leader in the number of new daily cases of COVID-19 and the worst performing of all major economies during the pandemic so far. How did we manage this double feat? Not through ‘acts of god’, but because of the incompetence and apathy of our current leadership.
Data on the decline
•The estimated 24% GDP contraction in April-June 2020 compared to the previous year is the worst performance among G20 economies, and even compared to other South Asian countries. But these numbers are likely underestimates because they are based on information from the formal or organised sector, extrapolated to informal unorganised activities. The actual decline is probably worse. Physical indicators such as the index of industrial production (covering registered manufacturing) declined by more than 20%, but ground reports indicate that unorganised manufacturing declined by much more. Many micro, small and medium enterprises (MSMEs) in manufacturing and services are still closed or functioning at a small fraction of their capacity. Wage incomes are falling more sharply than GDP because of the combination of employment declines and falling wage rates.
•There is other bad news in the GDP data: every sector other than agriculture declined sharply, especially the more employment-intensive sectors. The good rabi harvest and very good monsoon provided some respite in agriculture, but with incomes down, farm prices are unlikely to revive and ensure sufficient returns for cultivators over the year. Government consumption expenditure increased by about 16% over the same period in the previous year, but since total investment fell drastically (by around half), it is likely that public investment also fell. And gross value added in public administration, defence and other services fell by more than 10%. Around 90% of this is salaries. Central government salaries have not fallen, so the squeeze must have fallen on State governments: many of them have probably frozen or delayed salary payments.
Grave distress
•Meanwhile, the pandemic continues apparently unabated: all talk of “flattening the curve” (as wishful as the “green shoots” in the economy that official spokespersons keep seeing) has vanished, replaced by the completely meaningless indicator of recovery rates which are bound to improve with more cases. The brutal national lockdown generated economic collapse even before the disease had spread much. Instead of testing, tracing, isolating and treating — which is costly but is still the only effective way to deal with this disease — the central government shut everything down across the country without warning. Then it provided no compensation and almost no social protection to those (around 80% of workers) who lost livelihood. Migrant workers were forced to return in terrible conditions to their homes, where they have unwittingly spread the disease in rural areas with poor health facilities. Working people have been impoverished and debilitated by lack of nutrition because they have been less able to afford food. Now they are being told to go back to work (mostly at lower wages) even as the risk of disease has grown exponentially.
•What is more terrifying is that this is still just the beginning: there is little reason to believe that this awful trajectory will be halted unless there is a major change in government strategy on both health and the economy. The downturn is definitely extending into the current quarter, and probably the rest of the year, so we are staring at the biggest economic crisis in independent India.
Blow against States
•Lack of demand is a crucial reason for this. Both consumption and investment were declining well before the pandemic struck. Thereafter, despite the enormity of the economic collapse, the government’s relief responses have been pathetically small, barely touching the hundreds of millions of people affected and with little impact on aggregate demand. The halting steps taken on increasing liquidity have been effectively useless: bank credit has declined overall, and (other than favoured large companies) all types of borrowers have received less bank credit.
•The most disgraceful treatment has been of State governments. Despite the centralising imposition of the national Disaster Management Act, there was almost no coordination. State governments have been forced to do all the heavy lifting of dealing with the health crisis and the economic effects of the pandemic on their own, even as the Centre has denied them resources to do this effectively. The Centre is even denying the States their legal dues of the Goods and Services Tax (GST) compensation cess. This reneging of a contractual promise could spell the end of what has been a poorly conceived, badly planned and worse implemented GST.
•The consequences of this stinginess will be felt directly by citizens. Most State governments front-ended their expenditures for the entire year to deal with the crisis and are now running out of money. Unlike the Centre, they face hard budget constraints and gave up their revenue-raising powers to the GST. They are now being told to borrow money (that the Centre owes them!) when it is uncertain how they will repay. This is going to affect their spending for the rest of the year and people will feel the results in reduced basic services.
Roll out a fiscal package
•None of this was necessary or “god-given” and could have been averted with the right policies. Even now, this terrible trend can be reversed. The central government must immediately provide a large fiscal package (with actual money made available, not empty promises) including the following: pay the State governments their pending GST compensation dues and provide more resources in addition to deal with the pandemic and its effects; universalise the Public Distribution System (PDS) and provide free foodgrain (10 kg per household per month) for at least the next six months to anyone who needs it; provide Rs. 7,000 per family for three months as compensation for the incomes lost during the draconian lockdown; double the number of days of employment per household under the Mahatma Gandhi National Rural Employment Guarantee Act to 200 per year (for this year at least) and start an urban employment guarantee programme; extend the debt moratorium and convert into a standstill (without requiring interest payments for that period) and make sure that fresh credit reaches MSMEs and farmers who are being deprived of it; provide much more dedicated resources for health: for all the pandemic-required spending, and to deal with other health concerns that have been ignored or postponed for the past five months.
•This will cost money, for sure; but not doing this will be even more costly for the economy and the people. Not spending now will push the economy into a deeper hole, reducing incomes and, therefore, also taxes, and creating a bigger fiscal deficit even with lower spending. For now, these increased expenditures can be paid for by the Centre borrowing from the Reserve Bank of India (monetising the deficit, as governments across the world have been doing). This will not be inflationary as long as essential supplies are maintained, because demand is currently so low. Eventually, wealth taxes and taxes on multinational corporations (especially digital giants that manage to avoid taxes) must be thought of. Bold thinking and urgent action are the only way out.
