How GDP and GST failures are making India's middle class pay
While our country celebrates Dussehra, Puja and Diwali, many of its poorest and lower middle class citizens have little to celebrate. As many have cautioned, the Centre's fiscal deficit for April-August 2017 was Rs 5.25 lakh crore, the highest ever for this period in several years. Based on the new methodology of calculating GDP, the nominal GDP grew at just 9.3 per cent in January-March, making it evident that the government target for a nominal GDP of 11.4 per cent for 2017-18 is unlikely to be met. Changes in the GDP - in quarters or years - are a clear indicator of the rate of growth.
During this period, the non-tax revenue also fell. For April-August, the non-tax revenue was Rs 69,256 crore, or 24 per cent of the full-year target, compared to the 32.5 per cent for April-August 2016. With the fiscal situation tight, the capital expenditure turned out to be only Rs 1.09 crore - 35.5 per cent of the full year estimates - down from 37 per cent for the same period last year.
Union finance minister Arun Jaitley has asked state-owned companies to spend an additional Rs 25,000 crore in capital expenditure this financial year. This is likely to further increase the fiscal deficit.
How does all this add up for ordinary citizens? With consumer price indices rising, purchasing power for poorer sections, including the industrial workers and agricultural labour, is likely to drop, affecting their standard of living. Simultaneously, the sale of wage goods for these strata will correspondingly fall, as their real income, adjusted for inflation, drops.
So, a vicious circle forms. Inflation leads to the loss of purchasing power, which, in turn, leads to fewer sales of wage goods so that both buyers and sellers lose. This very vicious circle that many have learned while studying economics, (finance minister Arun Jaitley studied commerce not economics at Delhi University) is scarcely explained in the media.
The GST gamble
What about GST? Its highest rate is 28 per cent, before all other taxes can be added. Sample this: with 28 per cent tax (or even 10 per cent), if the prices for the taxed commodities go up by 10 per cent or Rs 10 for each 100-rupee product - in addition to other taxes - who does it benefit?
Primarily, the Centre and then the states, which require more revenue for their projects and expenses. So the ordinary citizen is subsidising the state and Centre finances, not the other way round. It is the classic case of Peter robbing Paul. It is common sense that because of the failure of demonetisation and the rising fiscal deficit, someone had to pay. In our case, it is the ordinary citizens who continue to pay. The upper classes are also hit, but their resources are enough to tide over the excesses of GST.
What does the large trade deficit mean? It's rise from $7.5 billion in July 2016 to $11.4 billion in July 2017 - owing to the excess of imports over exports - is further proof that the Modi government's "Make in India" policy is just another rhetorical gambit. In the meanwhile, the value of the rupee has fallen compared to the US dollar. It is very likely this would further increase our imports, leading to a growing trade deficit.
There is little public discussion about this in the media, excluding the business newspapers and channels.
So, if demonetisation has failed, and GST is in bad shape, what should be done? Firstly, direct taxes for the upper classes should be increased, rather than punishing the lower classes who are suffering from indirect taxes like the GST. India has about the lowest tax base in the world. The middle strata must contribute in accordance with its capacity. There should be more emphasis on direct taxes rather than indirect taxes, as the latter affects the poor and the lower middle class.
These policies were tried in India in the Nehruvian period, when foreign economists like Nicholas Kaldor, Paul Baran, Charles Bettelheim, et al helped in the process of building the second five-year-plan and the public sector. Instead of only promoting wealth, especially big capital, and burdening the poor, wage goods for the poor and middle strata must be subsidised. The sale of the public sector during the PV Narasimha Rao-Congress government led even Congresspersons to protest against "the family jewels".
Similarly, the NDA's sale of Air India is to benefit big capital. More such public assets will be sold.
It is selling India to make the extremely rich, richer.
Also read: Demonetisation was a disaster India did not deserve