28th December 2019 : The Hindu Editorials Notes : Mains Sure Shot
Note : Read today’s article mostly to do additions in your notes.
Question – comment on the economic slowdown and suggest the way ahead.(250 words)
Context – the ongoing economic slowdown.
Is the economic slowdown cyclical or structural?
- Refer to article of 25th December.
The present scenario:
- Private investment is low.
- Tax revenue collections have decreased. (later why cant raise gst)
- Hence the resources available with the states has also decreased (how read ahead).
- The unorganised sector is in great stress. If only this sector is taken into account it seems like a recession.
Hurdles and what should be done:
- How to raise income tax returns? – the government has to give lead to the economy since the private sector, in its reaction to the slowdown, has lost confidence and is investing less, which is only aggravating the economic crisis. An RBI report suggests that business confidence, consumer confidence and capacity utilisation are down. So, there is no escaping the fact that the government has to garner resources and give a boost to the economy by increasing its investments.
- As a result of economic slowdown, tax revenue collection has also been less collection of revenue – The government calculated tax revenues on the assumption of a 12% nominal growth. But, it has been around 9%, both last and this year. So, in 2018-19, tax revenue was short by about ₹1.5 lakh crore. he revenue shortfall for the Centre will be even larger than last year — around ₹2 lakh crore.
- As a result of this, the States get 42% of this revenue so they will get ₹84,000 crore less.
- Further, the concessions in corporate taxation of ₹1.45 lakh crore will also mean ₹58,000 crore less revenue for the States. While the Centre has obtained ₹1.76 lakh crore from the RBI’s reserves, no such succour is available to the States. The Centre will also get the proceeds of disinvestment but that is not shared with the States.
- In brief, the States will have a larger shortfall in resources than the Centre. So, what can they do? – since the main revenue of the states is from indirect taxes, the Goods and Services Tax (GST) Council met on December 18, where it was expected to help raise more indirect taxes by raising rates. The Centre should give the States: their share of Integrated Goods and Services Tax (IGST) and compensate them if the revenue growth of State Goods and Services Tax is less than 14%. This last is to come from the cess collected on sin goods and luxury goods.
- But the dilemma is that if the GST rates are increased, prices would rise and demand would further slump, further aggravating the slowdown and shortfall in revenues.
- Also the problem is compounded by the shortfall in direct tax collections. This is both the result of corporate tax concessions and the slowing economy. Income-tax rates cannot be raised now since that would be seen as inequitable — rich corporates will pay a lower tax rate than the middle classes, who pay income-tax.
- Also the I-T reductions – the government is reducing the income tax of the ITs to boost demand in the economy. But a cut in income-tax rates will largely benefit less than 2% of the citizens who pay a significant amount of income-tax. They are well-to-do and unlikely to increase consumption. Similarly, the cut in corporate tax rates will not boost demand since neither investment nor consumption will rise. Investment will rise only when capacity utilisation improves.
- The main root is that the unorganised sector has been missed – this has severely affected demand. But instead of recognising it, the government gave concessions to the corporate sector.
- f the unorganised sector is separately accounted for, the economy is in a recession — it is not just a slowdown as official data based only on the organised sector indicates. The fiscal deficit at all levels of government is already high so a policy decision is needed on how much more it can be. If the fiscal deficit is allowed to rise further, extra resources can be used to boost incomes in the unorganised sectors through greater public investments.
Way forward/ How to revive the unorganised sector/ informal sector?
- It is defined as consisting of hired labour and self-employed individuals working in the unorganised sector (unregistered enterprises) as well as wage and other casual labour working in the organised sector, the informal sector accounts for 92% of total employment and about 50% of GDP.
- The significant capacity of this sector for employment generation – especially at a time when the formal sector is experiencing jobless growth and facing considerable domestic and international challenges – necessitates its revival.
- How? – Increase the supply of formal finance – Given the drying up of informal finance, there is an urgent need to expand the reach of formal finance to prospective borrowers in rural and semi-urban areas. Unfortunately, government response in this respect has been inadequate.
- MNREGA is a well-run social security measure in operation since 2005 that offers at least 100 days of wage employment in a financial year to every household whose adult members volunteer to do unskilled manual work. Given the 60% increase in demand for MNREGA jobs after the note ban (associated with an estimated 50% loss, on average, in informal-sector earnings and casual jobs), the latest budget announcement of a 25% increase in allocation to MNREGA seems woefully inadequate. Our recommendation would be to increase MNREGA employment guarantee from 100 to 150 days, with a doubling of 2016-17 budgetary allocation immediately.
- Expand PDS – The expansion of MNREGA needs to be accompanied by augmentation of subsidised essential supplies to the rural and urban poor through the Public Distribution System (PDS), which has a proven track record of providing relief to the poor. This would help in raising the level of consumption, nutrition, and quality of life almost instantly and also enable the poor to undertake other expenditures, thereby generating direct and indirect economic benefits.
- While these short-term recommendations will impose a temporary strain on public finances, we believe that they will boost both demand for and supply of output over time, thus arresting the downward spiral of the informal sector (and also the overall economy) following the note ban.