📰 Market failure
New deal for agriculture needs good regulated markets ahead of private competition
•The ambitious initiative of the Narendra Modi government to bring about far-reaching reform in agriculture has run into severe weather, mainly over fears that the free market philosophy at its core could spell the end of MSPs for produce that has so far been centrally procured by the government. An allied party’s Minister, Harsimrat Kaur Badal (Akali Dal) has resigned in protest, and there is a strong pushback from farmers against three Bills that seek to replace ordinances issued in June, on key aspects of the farm economy — trade in agricultural commodities, price assurance, farm services including contracts, and stock limits for essential commodities. The opposition to the Bills, particularly on trade, flows from the position, articulated by Punjab, that agriculture and markets are State subjects, and there should be no tinkering with the MSP and Agricultural Produce Market Committees (APMC), that form the backbone of existing trading arrangements. Several States have already liberalised agricultural marketing, amending their APMC Acts, and some have allowed regulated private commerce including direct marketing. Yet, provisions in the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill, 2020, providing for unfettered commerce in designated trade areas outside APMC jurisdictions without levy of any fee, and more generally, empowering the Centre to issue orders to States in furtherance of the law’s objectives, have alarmed States. A challenge has been mounted by Rajasthan, declaring central warehouses as procurement centres under its APMC Act, and therefore required to pay a market fee to the State.
•Mr. Modi has characterised the arguments as misleading, promising that the MSP system will continue. This is welcome, but the new dispensation cannot bring cheer to small farmers, who form the majority and whose access levels to markets under the APMC system are at the rate of one for an area of 434.48 sq. km on average — well below the recommendation of the National Commission on Farmers (NCF), at one market for 80 sq. km. There is evidence also that mere liberalisation does not lead to private investment in new markets. When Bihar removed the APMC system, markets suffered loss of fee revenue, with no significant private investments in the sector. If the Centre’s intent is to strengthen competition, it should massively fund the expansion of the APMC market system, removing trade cartels, and providing farmers good roads, logistics of scale and real time information. Rather than opt for heavy centralisation, the emphasis should be on empowering farmers through State Farmers Commissions recommended by the NCF, to bring about a speedy government response to issues. Without strong institutional arrangements, laissez-faire policy may harm lakhs of unorganised small farmers, who have been remarkably productive and shored up the economy even during a pandemic.
New Delhi’s engagement after America’s exit must build on its resonating vision of a stable and plural Afghanistan
•Last week, on September 12, the much awaited intra-Afghan talks between the Taliban and the Afghan High Council for National Reconciliation opened in Doha, Qatar, 19 years after the 9/11 attacks on the U.S. that stunned the world and marked the beginning of the U.S. war in Afghanistan against al Qaeda and the Taliban, its local sponsors. The initiation of intra-Afghan talks was a key element in the U.S.-Taliban peace deal signed in Doha on February 29 between the U.S. Special Representative for Afghanistan Reconciliation, Ambassador Zalmay Khalilzad, and the Taliban deputy leader, Mullah Abdul Ghani Barader. Originally planned to begin on March 10, the process had to overcome many hurdles along the way providing a small glimpse of the difficult road that lies ahead.
Dynamics of negotiations
•The Trump administration soon realised that its 2017 policy of breaking the military stalemate by a small increase in U.S. troops was not working and reverted to seeking a managed exit. As the former Defence Secretary James Mattis put it, “The U.S. doesn’t lose wars, it loses interest.” Political optics demanded a relabelling of the withdrawal.
•Direct negotiations with the Taliban began two years ago with Ambassador Khalilzad’s appointment as Special Envoy. Actually, it became a three-way negotiation. The Doha track was with the Taliban, a second track was with Islamabad/Rawalpindi to cajole the Pakistan Army to lean on the Taliban to get them to the negotiating table, and the third was with Kabul to ensure that the Afghan government would accept the Doha outcome.
•Originally Ambassador Khalilzad had spelt out four objectives: an end to violence by declaring a ceasefire; an intra-Afghan dialogue for a lasting peace; the Taliban cutting ties with terrorist organisations such as al Qaeda, and U.S. troop withdrawal. Within months, the Taliban had whittled these down to just the last one with some palliatives regarding the third. Instead of an Afghan-led, Afghan-owned and Afghan-controlled reconciliation, it had become a U.S.-led and Taliban-controlled process with nobody claiming ownership or responsibility. Timelines were fixed for the U.S. drawdown by mid-June (followed by complete withdrawal by April 2021) and for removal of Taliban from the UN Security Council sanctions list by end-May. The Taliban have released 1,000 members of Afghan security forces and the Afghan authorities have freed over 5,000 Taliban from their custody. This process took longer than originally foreseen but has now been completed. The two elements that remained open ended in the U.S.-Taliban deal are the ceasefire declaration and the intra-Afghan talks.
The Taliban factor
•By end-June, the U.S. had reduced its troop presence to 8,600 as promised and in early September, Central Command (CENTCOM) commander Gen Kenneth McKenzie indicated that by November, the numbers would be down to 4,500. Despite two brief day truces in May and August for Eid al Fitr and Eid al Adha, the levels of violence showed no respite.
•Speaking the Doha at the opening session, Dr. Abdullah Abdullah, Chairman of the High Council regretted that more than 12,000 Afghans had been killed and another 15,000 injured since end-February. The number of attacks on government security forces and installations averaged over 80 a week.
•A report by the U.S. Special Inspector General for Afghanistan Reconstruction (SIGAR) issued in July covering the second quarter of 2020 (https://bit.ly/3hJqvpa) assessed that “The Taliban is calibrating its use of violence to harass and undermine the ANDSF [Afghan National Defense and Security Forces] and [the Afghan government], but remain at a level it perceives is within the bounds of the agreement, probably to encourage a U.S. troop withdrawal and set favorable conditions for a post-withdrawal Afghanistan.” The report expressed scepticism about whether the Taliban had cut ties with al Qaeda and stated that “the Islamic State-Khorasan maintains the ability to conduct mass casualty attacks”. A UN Analytical Support and Sanctions Monitoring Team report concerning the Islamic State and al Qaeda (also issued in July) concluded that “Al Qaeda in Indian Subcontinent continues to operate under the Taliban umbrella in Nimroz, Helmand and Kandahar provinces” with reportedly 400-600 fighters in the country (https://bit.ly/3hLjoN0).
Challenges ahead
•Perhaps nothing reflects the challenges facing the intra-Afghan negotiations more starkly than the title of the U.S.-Taliban Doha deal (https://bit.ly/3hIk2Lk) – “Agreement for Bringing Peace to Afghanistan Between the Islamic Emirate of Afghanistan Which Is Not Recognized by the United States as a State and Is Known as the Taliban and the United States of America”. This awkward phrase is repeated more than a dozen times in the Agreement. The leader of the Haqqani Network, Sirajuddin Haqqani, who is also the second-in-command of the Taliban happens to be on the U.S. wanted list with a reward of $10 million for information leading to his capture or death. All this is difficult to reconcile with the notion that the U.S. considers the Taliban a partner in counter-terrorism operations against the IS and other terrorist groups.
•In an op-ed in The Washington Post on August 14 (https://wapo.st/3mAFV2H), Afghanistan President Ashraf Ghani wrote that “the Afghan people want peace” and that is why the government “made the decision to take another risk for peace”. Calling on the Taliban to sit across from Afghan representatives to arrive at a political resolution, he added that “we acknowledge the Taliban as part of our reality” and urged that “the Taliban must, in turn, acknowledge the changed reality of today’s Afghanistan”.
•The current reality is that 74% of Afghan population is below 30 and has lived, for most part, in a conservative but open society. However, the Taliban continue to maintain the Kabul administration as an imported western structure for continued American occupation. Senior members of the Afghan government continue to be targeted including Vice President Amrullah Saleh who narrowly escaped an IED attack on his motorcade on September 9, even as 10 innocent Afghans lost their lives.
Evolving Indian stand
•Addressing the opening session of the Doha meeting, India’s External Affairs Minister S. Jaishankar reiterated that the peace process must be “Afghan led, Afghan owned and Afghan controlled” but Indian policy has evolved from its earlier hands-off approach to the Taliban. Speaking to Indian media a few months ago on separate occasions, both Ambassador Khalilzad and Russian Special Envoy to Afghanistan Ambassador Zamir Kabulov bluntly pointed out that if India had concerns regarding anti-India activities of terrorist groups, it must engage directly with the Taliban. In other words, if India wanted to be invited to the party, it must be prepared to get up and dance.
Major powers, finite interest
•The reality is major powers have limited interests. For the U.S.,the peace talks provide U.S. President Donald Trump an exit opportunity weeks before his re-election bid. The European Union has made it clear that its financial contribution will depend on the security environment and the human rights record. China can always lean on Pakistan to preserve its security and connectivity interests. For Russia, blocking the drug supply and keeping its southern periphery secure from extremist influences is key. That is why no major power is taking ownership for the reconciliation talks, but merely content with being facilitators.
•A report issued last month by the Heart of Asia Society, a Kabul-based think tank observes that “the prospect for peace in Afghanistan depends on regional consensus to support the peace process as much as it depends on actual progress in the intra-Afghan talks”. India’s vision of a sovereign, united, stable, plural and democratic Afghanistan is one that is shared by a large constituency in Afghanistan, cutting across ethnic and provincial lines. A more active engagement will enable India to work with like-minded forces in the region to ensure that the vacuum created by the U.S. withdrawal does not lead to an unravelling of the gains registered during the last two decades.
📰 On the GST issue, the Centre holds the baton
A large borrowing programme is inevitable; data and economic uncertainties show that States cannot handle the matter
•The Goods and Services Tax (GST) Council meeting has now been deferred to the first week of October due to sharp disagreement between the States and the Centre, the result of the unprecedented revenue shortfall faced by them. By July-end, the Centre’s fiscal deficit had reached Rs. 8.2-lakh crore, 103% of the full year’s target and 15.23% of the lower GDP. The States face a similar situation.
•The Centre had brought the States on board GST by promising higher revenue collection. Producing States such as Gujarat were sceptical because GST is a last point tax which is collected proportionately more in consuming States such as Bihar. States were lured by the promise of 14% annual growth in GST revenue over the base year of 2015-16. Any shortfall from this (for five years) was to be compensated by levying a cess on luxury and sin goods.
•States have been reminding the Centre of this promise of compensation for five years. Last year, because of the slowdown in the economy and a shortfall in revenues, the transfer to States was finally made by July 2020. The transfers due since April 2020 have been withheld.
•In the last GST Council meeting held on August 27, the Centre gave the States two options. First, they could borrow Rs. 97,000 crore (the shortfall in the GST revenue compensation) from the Reserve Bank of India (RBI) under a special window at a low rate of interest. Second, borrow Rs. 2.35-lakh crore (the total compensation shortfall) from the market with the RBI facilitating it. The burden of repayment would be borne by the future collections from the compensation cess. It was proposed that this cess which was to end in June 2022 could be extended to facilitate the repayment of the debt.
•Clearly, the Centre is reneging on its promise to the States. The implication is that the States are on their own — cooperative federalism is a casualty.
Accuracy of estimates
•What is the guarantee that the cess would continue beyond 2022? If the statutory provision of 14% increase is being given up, then how sacrosanct will something that is not even a part of the GST Act be? Adverse economic circumstances may continue given the great uncertainty about the duration of the downturn.
•Given the uncertainty, how accurate are the estimates of Rs. 97,000 crore and Rs. 2.35-lakh crore offered to the States? How are they arrived at when the Ministry of Finance is refusing to give a figure for growth in 2020-21?
Budgetary calculations
•The Union Budget presented on February 1, 2020 assumed a nominal growth of 10%. But, given that the economy is still at around 60% of last year’s level, very optimistically it is likely to contract for the year 2020-21 by at least 10%. So, optimistically, the Centre’s budgetary calculations will be off by at least 20%.
•Revenue will fall by much more than 20%. Corporate sector profits will fall sharply. Some sectors such as fast-moving consumer goods, or FMCG, and e-commerce will do well. But companies in sectors such as airlines, hotels and consumer durables will show losses and, therefore, pay little tax. Thus, corporation tax collection will fall sharply — much more than 20% compared to the budget estimate. Similarly, income tax collection will fall since a large number of workers have lost employment and/or have faced salary cuts. Many private firms are also likely to incur losses. So, income tax collection will also be short by much more than 20%. The direct tax/GDP per cent may be expected to fall from 5.5% last year to less than 4% this fiscal.
•If GDP falls by 10% over last year, instead of being Rs. 224-lakh crore, it will be about Rs. 184-lakh crore. Using the lower tax/GDP ratio, direct tax revenue will be short by Rs. 5-lakh crore compared to the budgeted amount. This is an optimistic guess. The States’ share of all taxes collected by the Centre is 42%, so they will lose Rs. 2-lakh crore.
Greater shortfall
•GST collection will also be short by much more than 20%. The production of luxury and sin goods has been severely impacted and they pay the high rate of tax — 18%, 28% and cess on top. The essential production which is affected less by lockdown either pays 0%, 5% or 12%. Due to a drastic fall in imports, the Integrated Goods and Services Tax (IGST) and customs duties will also decline. The extra tax collected on petroleum products will help counter the decline to an extent.
•Consequently, the indirect tax/GDP ratio can be expected to fall from 10.5% to 8% resulting in a drop of Rs. 7 lakh crore. About 60% of this loss will be from GST and half of that would be the loss of States. About half of the remaining part (Rs. 2.8-lakh crore) will also be a loss of States.
•The States’ GST shortfall would be about Rs. 2.1-lakh crore. On top of this, they will lose 42% of the shortfall in the Centre’s collection — so another Rs. 88,000 crore. The GST collection figures are gross; input credit remains to be paid back. So, the shortfall is likely to be greater than implied by the April to August figures.
•Thus, at an optimistic guess, if the economy declines by only 10%, the total tax collection will be down by about Rs. 12-lakh crore in 2020-21. The States will lose Rs. 6.4 lakh crore. The States GST revenue will be short by Rs. 3-lakh crore which should be compensated by the Centre. Subtracting from this the expected collection of Rs. 65,000 crore from cess we get the figure of Rs. 2.35-lakh crore.
•Even if the States take the loan of Rs. 2.35-lakh crore they would have an uncovered deficit of Rs. 4-lakh crore. Further, as many predictions are that the economy will be down by much more than 10% used in the calculations above, the revenue shortfall is likely to be far greater. This points to the dire position of the Centre (and the States) and the inevitability of a large borrowing programme. Only the Centre is in a position to do such massive borrowing.
