The shared blame of the GST Council

One aspect of the current implementation of the Goods and Services Tax that has mostly been left out of the common discourse is the GST Council. There seems to be a lack of understanding about what it is, what its responsibilities are, and its membership.

As a result, a lot of the blame is erroneously placed on those who are not fully deserving of it — namely, Finance Minister Arun Jaitley and his ministry.

The GST Council is the nodal body in charge of drafting the rules and setting the rates for the new indirect tax regime. As such, it has almost completely replaced the Central Board of Excise and Customs, something the tax officers have complained to Prime Minister Narendra Modi about.

Consensus at work

But the important thing to understand about the Council is that it is not a one-man show. The Finance Minister is merely the Chairman of the Council — the members include the finance ministers or designated ministers of each of the other States and union territories with legislatures.

The Council also has a host of technical officials guiding it and explaining the repercussions and legality of the various decisions it takes.

As such, laying the blame for every GST complication or rule change at Jaitley’s feet is only partially appropriate. The structure of the GST Council is such that the Centre has a one-third weightage during a vote, while the States together have a two-thirds weightage. So far, however, not a single issue has come to a vote in the Council, which means that every decision has been taken by consensus.

This is a sensible approach taken by the Finance Minister and the Centre in general. With 17 States and union territories led either by the BJP or its NDA allies, the combined weightage of the Centre and these States would render any vote a one-side affair.

Instead, the Council has met time after time trying to establish a consensus on some very contentious issues. For all the criticism about the government trying to bulldoze the Opposition, it has been remarkably patient with all their objections within the Council.

This works in the Centre’s favour since no member of the Council can later claim that his objections or recommendations were overruled through a vote. That’s the exact point of a consensus — everybody shares the blame equally.

The finance ministers of the States have so far been very lucky to escape the criticism faced by Jaitley. But the fact of the matter remains that the GST Council has changed the rates on more than 100 goods and services and has issued more than 35 clarifications, corrections, and rule changes since GST was rolled out.

And the blame for that — and for the very need for so many revisions — should equally go to the state finance ministers as it does to the Union one.

That said, there is a need for the Council as a whole to be made more accountable. The CBEC could be audited by the Comptroller and Auditor General (CAG) and by the Public Accounts Committee (PAC) and so was answerable to Parliament. The GST Council does not have any such oversight mechanism. It operates in a sphere of close to zero formal accountability.

This is not to say that, as the Union Finance Minister, Arun Jaitley is helpless against the whims of the States. He is a very shrewd politician and a capable speaker. He has the ability and the political heft to quash most objections when they come up for discussion. And, indeed, that might be happening.

But, if that is the case, and the state ministers want to be spared the blame of hasty and ill-informed decisions, then they ought to force a decision to come to a vote. That will make their dissent public. As the situation stands now, there is no reason to believe that they don’t agree with each and every decision taken by the Council. And so, there is no reason to believe why they should be spared the blame.

Centre must steady the economy ship

Finance Minister Arun Jaitley has been holding meetings with his ministerial colleagues, Secretaries, and the Chief Economic Advisor to ascertain what the Centre can do to boost the steadily slowing economic growth.

The assumption here is that the third time’s the charm, and government intervention — unlike the first two times it tried it, with demonetisation and a hasty GST — will actually pay dividends.

The truth is that its own actions, and a poor global economy, have tied the government’s hands. There is nothing it can do, except ride out the storm. To illustrate this, let’s take the old, faithful formula for aggregate demand. Aggregate demand = C + I + G + (X – M). What looks complicated is actually common sense.

The formula basically says that the total demand in the economy is equal to the sum of consumption (C), private investment (I), government expenditure (G), and the difference between exports and imports (X – M). When broken up this way, it becomes clear that no additional steps can be taken to spark any of these sectors into action, and if they are, their effect will be marginal at best.

Consumption slump

Over the last year, private consumption has been the one engine that has seen the economy achieve even the slow pace of growth it has. But a combination of demonetisation and GST has dampened the appetite for consumption to such an extent that companies are already preparing themselves for a poor showing in the festival season.

In any case, since so many companies ran aggressive and attractive clearance sales in the run-up to GST, consumers are unlikely in the coming months to flock to retail with their usual enthusiasm. What used to be a big bonanza come Diwali/Dusshera/Durga Puja time has now been dissipated. A slump in private investment is perhaps the biggest cause for worry here, especially since it is a persistent problem that will not go away without a comprehensive analysis of the situation and time-bound concrete steps being taken.

Companies invested heavily during the boom years just before the recession hit, and so, when the economy did slow down and demand receded, they found themselves saddled with the deadly combination of surplus capacity and debilitating loans. Neither will allow companies to increase their investments, so that engine of growth is not an option for a while.

The Reserve Bank of India can step in here and lower interest rates to try to boost consumption and investment, but that’ll result in marginal improvements since it’s not as if people and companies are not spending because loans are too expensive.

No cash to boost spending

Exports, too, have been languishing due to weak global demand. Recently, with a strong rupee, imports have recovered somewhat, but the effect is just too small to really matter.

In such times, the recourse of choice is increasing government expenditure. That’s not going to work this time. Tax revenue, due to demonetisation as well as GST, has suffered, so the government does not have cash in hand to increase its spending. According to a recent Reuters report, the government is, in fact, considering cutting its expenditure due to poor revenue growth.

Add to this the untimely demand by the Opposition for the removal of the few taxes that are still remunerative — namely, the Excise duty on petrol and diesel. There are also calls for a ‘stimulus package’.

Not only does the government not have the money to spend, but it has set itself such strict fiscal deficit targets — of 3.2 per cent of GDP this year — that even if the money was there, it would find it difficult to spend it. The only option left is to borrow money to spend, which is a decidedly inferior option.

There is, in short, nothing the government can do for the economy except wait out the current sluggishness. The fact of the matter is that most of the pain of GST is being felt by the manufacturing sector, which accounts for less than 20 per cent of GDP. This monsoon has been relatively okay, and so agriculture will bounce back from the ravages of demonetisation, and services was never really affected.

It is good that Finance Minister Jaitley is trying to be proactive in trying to help the economy, but the best thing he can do right now is to run a steady ship and not change the GST rules often. Certainty about the future is perhaps the best medicine on offer right now.