GST & Subsidies – The Pluses, and how to mitigate the Minuses

Published August 6, 2017 by vishalvkale

In the midst of these seemingly hopeless times with nearly every economic parameter going down, it is heartening to see a small, tiny uptick in credit offtake from banks {Business Standard ,”All Eyes On RBI Today”,  2nd August Credit Chart – See Chart below}. I haven’t seen many people note this : but the chart is clear. There is a small uptick – this may of course be irrelevant, and unsustainable; but it is present. It is now for the Government to ensure this uptick is sustained; increasing Credit Offtake is a prerequisite for a sustained Economic Recovery. 

However, it is with regret that I admit my article isn’t about recovery prospects; as most of my readers will no doubt be aware – I don’t indulge in speculation; that requires detailed data trends which are not available to me, as well as tools. This present writeup is more about the risks that are facing us in the current situation, which taken individually or together can derail this small beacon of hope. The beacon of hope isn’t just the Credit Growth, but rather the GST as well as the increasing Tax Base; and of course, not to forget the welcome initiative of this Government to take some hard decisions. As to whether these hard decisions are enough or not, is another story, for another article. As I said, speculation isn’t my style, neither is it my current forte.
Lets us tackle this most prickly of issues straightaway. Article after article is claiming-  in the Pink Media {I freely admit I have stopped reading White Media, as I find them not upto the Mark. I count Livemint in Pink Media, as in Economic Media} – that the current dispensation is not taking hard decisions, or real reform moves. I respectfully submit that the reality is the exact reverse – they are not only taking Hard Decisions, they are doing so with a single minded determination. Let us give credit where credit is due.
The GST is itself a hard decision; fine – it is, well, let us say not upto the mark – but it is a start. {Libs, hold on please – will attend to GST in a separate section here}; yet, the Government went ahead, warts and all. This will unlock future potential, as I analyse in a strategic analysis of GST impact subsequently in another article. Next, the rather unfortunate tendency of this Government to target subsidies with a single minded determination and focus brings a new atmosphere in the country and among the people.
Bhakts are over the moon over this reform; Libs are cautiously optimistic, while being wary of the downsides of this move – which are, quite frankly, way too many and way too technical to be stated in a short summary. Both sides are right. The news on the ground isn’t great; the move has choked the economy, as we can see in the trickle of information that is now coming out. While there is logic in the claim that these are temporary, this needs a careful look at.
Trucks – one article said 20-30% – are not getting loads; Chemists are not ordering some key drugs in sufficient quantity as they fear input credit will not be passed on; SME order books are empty, and they are paying a temporary price; Hotels business is down 20; Manufacturing sector took a big hit in July – which is the sharpest decline or hit in nine years; Housing and Real Estate is showing signs of stress due to RERA and GST; Textile Segment – esp the small units – is also showing stress due to GST. You can of course claim that these are short-term changes, but there is more to it, as we shall see.
The Government, at long, long, last – has shown some signs of attacking our crippling subsidy problem. We are a developing country, and the more we spend on Subsidies, the lesser we have for Development and Capital Expenses. In that light, it is beyond argument that this is one area that required attending to. At last, we are doing it – but is our approach right? There are some indications that the Government is thinking of tinkering with the kerosene subsidy, and the fertilizer & Gas subsidy.
On the face of it – this looks a great move. But go deeper, and problems emerge. The government has announced that the price of subsidised kerosene will be raised by 25 paise per fortnight until the subsidy goes. But look elsewhere – 40% of Kerosene is diverted, true. What of the balance 60%? That is used by those whom it was meant for. Second, cooking gas subsidy is being phased out. Third, railways – where catering and Blankets etc might be phased out.
First of all, as all indicators point out – as I look at in this article of mine on my blog – The Indian Economy has not been faring too well. On top of that, demonetization created massive disruption particularly on the SME and Unorganised & farming sectors of the economy. Adding to this potpourri was a potent cocktail called The GST, which created further disruption. Point to be noted here – this was bound to be felt highest in the SME and Unorganised sectors, as the Larger players had the time, knowledge and the money to implement change processes as well as whither the short term storm. Also remember that the contribution of the Small and Unorganised sectors to the Indian Economy is to the extent of 40-50% of GDP as well as being the major contributor to Savings as well as employment
While the overall direction’s utility and benefits are actually beyond argument – the bhakts have it right there; the downside risks outlined above need to be taken into consideration. The Smaller players in various sectors, who together make a large segment – how long will it take for them to feel the benefits of the new regimen of the Economy? Do they have to ability to whether this storm? If not – what will be the impact? Joblessness – how many people will lose their jobs? {There is evidence of this, look in links enclosed} Or how many companies and operations will have to shut shop? And quite apart from the economic impact, what about the human side of the story? The two taken together, make a strong case for a more Human approach, for reasons of pure economics, as I look at in the next part..
The human side is what worries me the most, followed by the ability of the small sectors to engage with and emerge victorious over the challenges thrown at them. That they will win eventually is beyond argument – history is mute proof of that. But the process of change can be painful. It will require deep strategies, executed to perfection, to mitigate the impact, involving re-skilling, re-training, and a very soft handling. As on date, there seems to be no evidence of this happening. What will happen to the people who will get hurt in the interim is open to question; they will just have to cope on their own.
The other critical factor is the ability of the smaller players to weather the change. Take subsidies; sure – some of it is a waste. But large portions do reach the intended beneficiaries {read Kerosene article below}; to this category of people, people like you and me perhaps, the small amount of help through subsidies is actually quite large from their point of view. Instead of devising mechanisms to reduce misuse, the Government is doing away with them altogether. Similar is the case of the facilities example – instead of finding ways to improve, the Government might just do away with them.

Sure, these are hard decisions – some of them are bound to be beneficial, given they are based on solid logic. But does the on-ground reality in industry amenable to such gut-wrenching changes? If it isn’t, it doesn’t mean we don’t do the changes – all I am saying is that there is way to take hard decisions – and this isn’t it. Once again, it boils down to the most tricky of all things in life : implementation. Further, there is also a distinct feasibility of markedly improved strategisation as well as tacticalisation. I refer to strategic ways of mitigating the downside, and the precise tactical roll-out plan of such far-reaching changes; many, many methods are feasible, which given the audacity and correctness of the overall objectives and the strategy, will certainly lead to benefits for all… but is anyone listening? I fear not…


And several others over the course of my regular readings… 

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