Economics is all about connecting dots, so let us give a shot and decode or understand what it says. I am sure you must have encountered a headline which said India is worse off due to this crisis, to be precise 23.9% down. Yes, India was the worst affected nation in G-20 due to the pandemic.
Context -
A total lockdown happened in March, which continued till May end. In June, we had graded unlocking procedure. Other than the large exodus of migrants back to their villages, a lot were suffering.
We had the strictest lockdown across the globe to contain the pandemic, which is commendable, but the fact is, health and economy work together. If we focus on the one, we lose the other. As simple as that!
Multiplier -
During the lockdown period, many businesses did not operate. There was no production, no sales, which in turn resulted in no profits. All this is understandable, but on the same hand, there were no tax payments made by the businesses. Whether GST or Corporate tax.
Effect -
Now, it is time to dive into the topic. We all know that the government makes money through imposing taxes, on individuals, corporates, and goods. But if the taxes are hit, where the revenue would come from?
Let us recall some economics, there is a term called ‘Fiscal Deficit’, it is simply how much the government borrows to make good deficit (expenditure – revenue).
Now, the situation at hand where revenue is badly hit, keeping the expenditure constant due to relief programs, the stimulus package. The fiscal deficit is bound to increase manifold.
Digging Deeper -
Now the fiscal deficit is a worrying subject for the government as it has a spiral effect. Let me explain, the government needs to borrow more to balance the expenditure and revenue, when that happens, the Debt/GDP ratio increases, which implies the government debt concerning annual GDP.
Now, let us go back to the beginning, GDP has already worsened. So, in this case, the denominator is already a lesser number, which puts the government under more pressure. As higher Debt/GDP is worrying for an emerging economy on the likes of India.
According to a report by SBI, the debt is estimated to touch 87.6% of the GDP. This is unprecedented.
Implication -
Everything in economics has an implication. That is why policymakers contemplate hard before formulating any such policy.
Example - if the government makes $100 as revenue in this year and spends $75 as expenditure, it is still left with $25 to spend on welfare, infrastructure. But, $15 was the interest payment to be made in this year, which leaves us with the lesser amount to spend on job creation and on things which matter.
GST Saga -
If the government does not have funds, from where would it pay the states? That is exactly the argument between centre and states for the GST compensation cess, which amounts to 97,000 Crore as per the finance ministry.
Any loss in states’ revenue due to the implementation of GST is compensated by cess, but this time around, there is absolute scarcity.
So, the centre asked the states to borrow on their end and this led to so much trouble and complications. Because it is not only the centre but also the states who have faced the same patterns of a shortfall in their revenue.
After Effects -
Nothing in the economy is in isolated, everything has a spiral effect.
Before addressing the next round of stimulus package, which is must need, we need to work upon the tax shortfall. To achieve normalcy, we need healthy tax collections. GST collections are recorded monthly, which are lesser than what they were the year before.
Other complications which arise are how much to borrow, from where to borrow. As the pandemic induced recession has impacted every aspect of the economy to some degree.
A lot of borrowing must take place and there is a lot of stress in the environment, which results in expenditure squeezing. You remember the example given before, lesser money to spend on infra and other development purposes, yes that is inevitable.
If that happens, there is not much investment from the government, which further degrades the consumer and investment sentiment in the system overall.
Divestment -
Divestment simply means when the government sells stake in its businesses, every year budget allocates some amount which the government would make through this route. So, in this year the figure was indeed an ambitious one, 2.1 Lakh crore, this is 4 times of FY20 divestment figure.
Now, what aggravates the situation is Govt unable to sell stakes. So, revenue takes a hitting there as well.
Conclusion -
My point of writing this article is, before looking at stimulus, and relief plans. The government should look meticulously on its position of revenue and make policies with a lot of deliberation, to ensure the well being of the economy and the society at large.
Written by – Manvinder Arora
Edited by – Ivanova
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