Pruning GST


Bid to ensure rate of not more than 18 per cent for most items may be politically timed, but is economically sound. It is not surprising, then, to see Prime Minister Narendra Modi promising to ensure a Goods and Services Tax (GST) rate of not more than 18 per cent on “99 per cent of items”.

Adherence to fiscal prudence is too much to expect when national elections are hardly four months away. The prospects of this are even less when the ruling party has suffered losses in key “semi-final” state polls against a suddenly energised Opposition, which has made populist farm loan waivers its key campaign theme. It is not surprising, then, to see Prime Minister Narendra Modi promising to ensure a Goods and Services Tax (GST) rate of not more than 18 per cent on “99 per cent of items”.

That decision would mean cutting the rates on cement, auto components, motor vehicles, tyres, movie tickets, digital cameras or even ACs, large-screen televisions and dishwashers — leaving out only luxury or sin goods such as big cars, personal aircraft, cigarettes and alcohol from the latest pruning exercise — from 28 per cent to 18 per cent. If endorsed by the states at the coming GST Council meeting on Saturday, it would entail revenue implications. This, when average monthly GST collections of just over Rs 97,000 crore during April-November are below the targeted Rs 1,12,000 crore figure.

But when it comes to GST, there is at least a sound economic logic to eventually move to a structure where all but a handful of goods and services are not taxed beyond the standard rate of 18 per cent. True, the move to hasten that process may be politically motivated. However, the short-term fiscal losses in this case are still worth bearing and can well be recouped through higher consumption. Also, it makes little sense to levy 28 per cent duty on a product like cement; if the economy requires a bit of fiscal stimulus, there is probably no better way to do it than by slashing the GST rate on a universal construction material.

Farm loan waivers, on the other hand, are devoid of economic rationale. Apart from wrecking public finances, they harm farmers by discouraging banks from further lending. Farmers deserve help. But the best way to do that is through making direct per-acre transfers to their accounts and not by encouraging even those who repay loans on time to turn defaulters.

The one consolation — and hope — is that the current fiscal populism will not last beyond six months. Moreover, the economy today is in a much better shape than just over two months ago, when crude oil was trading at $80-85 a barrel, the rupee was threatening to cross 75-to-the-dollar and 10-year government bond yields were at nearly 8.2 per cent. These have since eased to below $60, 70-71 and 7.2 per cent, respectively. With consumer price inflation, too, at levels where the RBI can even think of interest rate cuts, the damage from bad economics may not be much — provided good sense prevails sooner than later.

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