Editorial Analysis for 19th September 2020

Market failure: New deal for agriculture needs good regulated markets ahead of private competition

Paper:

Mains: General Studies-III: Technology, Economic Development, Bio diversity, Environment, Security and Disaster Management

Context

The ambitious initiative of the central 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.

Opposition to the Bills

• 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.

How can the bill affect?

• 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.

On the GST issue, the Centre holds the baton

Paper:

Mains: General Studies-III: Technology, Economic Development, Bio diversity, Environment, Security and Disaster Management

Context

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.

Promising higher revenue collection

• 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.
• 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.

1. First, they could borrow ₹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.
2. Second, borrow ₹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.

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 ₹224-lakh crore, it will be about ₹184-lakh crore.
• This is an optimistic guess. The States’ share of all taxes collected by the Centre is 42%, so they will lose ₹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 ₹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 (₹2.8-lakh crore) will also be a loss of States.
• The States’ GST shortfall would be about ₹2.1-lakh crore. On top of this, they will lose 42% of the shortfall in the Centre’s collection – so another ₹88,000 crore.
• Even if the States take the loan of ₹2.35-lakh crore they would have an uncovered deficit of ₹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.