Fiscal crisis

A neoliberal blow

Print edition : July 03, 2020

Union Finance Minister Nirmala Sitharaman chairs the GST Council meeting through videoconferencing from her office in New Delhi on June 12. Photo: PTI

The fiscal crisis that the Central government is trapped in cannot be blamed on the COVID-19 pandemic, since the revenue shortfall is primarily a result of the government’s neoliberal measures such as business-friendly taxation stance and the GST regime.

India’s Central government was faced with a fiscal crisis even prior to the COVID-19-induced lockdown. Provisional estimates from the Controller General of Accounts of actual revenues collected in financial year 2019-20, or the fiscal year that ended March 2020, point to an erosion of revenue receipts of critical proportions. As compared with the original budget estimate of Rs.19.6 lakh crore, and a revised estimate (or late-in-year projection) of a lower Rs.18.5 lakh crore, actual revenue receipts are currently placed at just Rs.16.8 lakh crore. This implies that the actual figure is more than 14 per cent short of projections in the first Budget of the second Narendra Modi government and 9 per cent short of the projection (revised estimates) for financial year 2019-20 in the Budget presented by Finance Minister Nirmala Sitharaman this February.

The revenue shortfall has meant that the Centre’s revenue receipts grew by just 2.9 per cent in 2019-20 when compared with the previous fiscal year, which implies that real revenues (adjusted for inflation) have in fact fallen. This deceleration in revenue growth occurred in a year for which only about a week fell in the lockdown period, so the serious revenue shortfall is a pre-COVID-19 phenomenon and cannot be blamed on the sudden stop induced by the pandemic.

Given the government’s obsession with realising unrealistic fiscal deficit targets, this compression of revenue growth has meant that the Centre’s dependence on exceptional transfers from the Reserve Bank of India and on receipts from the sale of public assets to meet even routine expenditures has increased significantly. When these “exceptional” sources of receipts fall short of expectations, as happened in 2019-20, meeting even unambitious expenditure plans requires window-dressing budgetary figures. On the ground, capital expenditures and welfare expenditures, including on health, would have fallen even relative to woefully inadequate budgetary allocations.

Shrinking tax revenue

Underlying this fiscal mess is the failure to mobilise adequate resources through taxation at a time when the need is for substantial additional resource mobilisation. A casualty of the business-friendly taxation stance of the National Democratic Alliance government has been a substantial loss of buoyancy with respect to direct tax generation, with tax revenues falling despite the low levels of the Centre’s direct tax to GDP ratio and rising income inequality in the country. Net direct tax collection, or gross direct taxes adjusted for tax refunds, declined in nominal terms from Rs.11.36 lakh crore in 2018-19 to Rs.10.49 lakh crore in 2019-20, or by close to 8 per cent. The factor dominantly responsible for this decline was the decision, in the midst of a demand recession, to seek to stimulate the economy with corporate tax concessions announced in September 2019.

That “stimulus” took the form of a huge reduction in the corporate tax rate from 30 per cent (or an effective rate of 34.61 per cent after surcharge and cess) to 22 per cent (or an effective rate of 25.17 per cent) for domestic companies that do not avail of tax incentives or exemptions. New domestic manufacturing companies incorporated on or after October 1, 2019, will pay corporation tax at the reduced rate of 15 per cent (which is an effective rate of 17.01 per cent) so long as they do not avail themselves of incentives and exemptions. And the minimum alternative tax (MAT), applicable to companies that do avail themselves of incentives and exemptions, has been reduced from 18.5 per cent to 15 per cent. This is a huge bonanza, which dominantly explains the contraction in direct tax revenues.

The second contributor to the compression in tax revenues is the limited buoyancy of indirect tax revenues garnered through the Centre from the goods and services tax (GST) imposts. In fact, in four of 12 months, Central revenues from GST in 2019-20 were lower than the sum collected during the corresponding months of the previous year. Overall, the Centre’s revenues from GST rose by 8 per cent in 2019-20, despite the lower-than-projected base level in 2018-19. To recall, the government had promised States a 14 per cent annual increase in revenues from a base-level GST estimate, failing which they were to be compensated with collections from a special cess. This suggests that, at the very least, the Centre expected a 14 per cent growth in GST revenue. The 8 per cent realised in 2019-20 was, therefore, way short of expected revenue growth. The GST regime was launched in July 2017. So the argument that teething troubles and initial glitches in the implementation of a new “game-changing” measure are responsible for shortfalls in GST receipts no longer applies. Clearly, the GST regime has proved a failure, even while it has substantially curtailed the limited space that was available for States to increase their own tax revenues, in pursuit of an unrealisable “one nation, one tax” goal. That failure is now haunting the Centre as well, besides severely damaging the fiscal position of State governments.

The poor performance with respect to corporate tax revenue generation and generation of revenues from GST, which is a second-best adaptation of value- added taxation within a federal polity, is a fallout of the shift to a neoliberal policy regime. A defining feature of such a regime is a lenient corporate tax structure, ostensibly aimed at incentivising private investors and unleashing the animal spirits they are presumed to possess. That also explains why when a demand recession is dampening investment and curtailing growth, the government decides not to spend to revive demand but hands over money to the corporate sector with tax concessions, which firms will not divert to investment in depressed market conditions.

The GST, too, is a neoliberal measure. The United States had a role to play in the spread of value-added tax (VAT). The [Carl] Shoup mission to occupied Japan after the Second World War argued for its introduction. Subsequently the United States Agency for International Development promoted VAT and sought to popularise the system through financial and technical assistance to developing countries. All through that period, the U.S. government was unwilling to implement the system at home. Later the World Bank and the International Monetary Fund played a role in pushing the system. More than half the countries that introduced VAT in the 20 years starting 1991 did so on the basis of advice and assistance from the IMF’s Fiscal Affairs Department. Thus, the spread of VAT does seem to have a lot to do with the transition to market fundamentalism and market-friendly polices starting in the 1980s.

This is understandable. A neoliberal strategy substantially reduces taxes on trade. It also requires incentivising the private sector with light-touch taxation of higher incomes and corporate and financial profits. It also emphasises the need for financial consolidation and reining in public debt. All of this necessitates reliance on forms of indirect taxation other than taxes on trade to sustain expenditure, however much curtailed. The nature of VAT helps in such a context. As an indirect tax, VAT is not directly levied on the buyer and the legal liability is that of the producer, so it is less visible. Moreover, since VAT is imposed at each stage of the production process, it gets incorporated into costs so that the final consumer would only note the tax paid on value added at the final stage. This helps to legitimise a shift from progressive direct taxation, especially corporate and income taxes, to regressive indirect taxation. All of this favours a shift to VAT under neoliberal regimes, which partly explains its history. It implicitly serves as one more instrument to redistribute incomes from ordinary citizens, including the poor, to the very rich. The problem in India, however, is that the GST version of VAT does not work well.

Once these neoliberal shifts on the taxation front begin to adversely affect government revenues, within a neoliberal fiscal framework of caps on fiscal deficits or spending financed with borrowing, a corollary is sluggish government spending and lower growth. This had begun to manifest itself in India since 2016, with growth in year 2019-20 (pre-COVID-19 lockdown) now estimated at 4.2 per cent, the lowest since the new GDP series was launched. That sets up a feedback loop, with low revenues which curtail government spending, reducing growth, which then further reduce revenues for any given level of fiscal buoyancy, or responsiveness of revenues growth to income growth. Revenue growth shrinks both because neoliberal fiscal reform reduces fiscal buoyancy and because growth itself begins to fall.

These trends have other external effects. Neoliberal governments seek to address sluggish revenue growth with the short-sighted measure of selling profitable, revenue-earning public assets to obtain what are euphemistically termed “non-debt creating capital receipts”. As the fiscal crisis intensifies, the dependence on privatisation receipts increases. The Central government pursued that trajectory successfully in 2018-19 when, as compared with budgeted receipts of Rs.80,000 crore from privatisation, the government actually managed to mobilise close to Rs.95,000 crore, hawking profitable assets and riding on a buoyant stock market. But as growth falters, so does investor enthusiasm for public equity or the firms themselves. In 2019-20, the government had hiked the budgeted receipts from privatisation to Rs.1,05,000 crore. But as the economy slowed it managed to mobilise only a little more than Rs.50,000 crore.

The picture is now clear. As the government gave up its role as development leader within a neoliberal growth strategy, growth rode on a credit bubble. With that bubble bursting and precipitating non-performing assets in the banking system, the credit-led boom gave way to a slowdown. The neoliberal fiscal response curtailed government revenues and expenditures further. Growth fell sharply and so did revenues. In the event, the government is trapped in a fiscal crisis and the economy is in low-level disequilibrium.

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