Finance Minister Nirmala Sitharaman, in panic, is barking up the wrong tree

The Finance Minister has almost completely gone back on proposals made in the budget she presented five months ago. But curiously, her moves are not aimed to boost consumption .

 Finance Minister Nirmala Sitharaman, in panic, is barking up the wrong tree
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Rahul Pandey

It has become all too familiar. Car sales continue to plummet, consumer demands continue to fall and the Finance Minister continues to make announcements aimed at reviving the economy. Like dog-whistles, hate speeches and mob-lynchings, bad news from the economy is the new normal.

We have had slow-downs in the past but India has never experienced a contraction in sales because of reduced consumer demand.

Nirmala Sitharaman has made a series of announcements, which range from ensuring interest rate cuts are passed on to consumers faster, provide a financial support package for stuck real estate projects and a host of other measures but she did not do the one thing she should have done, namely cut indirect taxes, give people more money to spend.

And for God’s sake, stop thinking that pain killers would help a patient who is clearly losing blood.

They might not say it, but everyone in corporate India knows that things are going to get a lot worse before they get better. Everyone believes that the descent of Prime Minister Narendra Modi has begun and unless he pulls a rabbit out of the hat, which seems unlikely, even a servile media would not be able to save him.

When passenger car numbers reported a 41 per cent decline in August, most people did not quite comprehend how bad this number was. A total of 1,15,957 cars were sold in August 2019, which is about 80,000 fewer cars sold in August 2018.

What is worse, this is the lowest number ever since SIAM, the automobile manufacturers’ body, started recording these numbers in 1998.


Union Labour Minister Santosh Gangwar’s statement, however, needs to be looked at with deeper concern because when the Labour Minister makes a comment on the quality of labour work force, it deserves some seriousness.

What Gangwar is saying is that ‘Skill India’ has turned out to be a dud and all the money spent on it (₹17,000 crore in 2018-19 alone) has failed to make any impact. The Labour Minister might have saved Finance Minister Nirmala Sitharaman the blushes but took Skill Development Minister Mahendra Nath Pandey to the cleaners, even though both come from the same state.

While a lot has been said about how Demonetisation impacted the India consumption story, the impact of GST has neither been evaluated nor analysed with the seriousness it deserves.

That may have been because of former FM Arun Jaitley’s sterling ability to steer the media discourse, but it was also based on some seriously exaggerated economic assumptions.

After the Demonetisation fiasco, the government brought in GST within months, primarily to balance out the negative headlines. The states had reservations about GST and the impact it would have on their finances. The then FM assured to compensate the states if their revenue growth fell below 14 per cent with 2015-16 as the base year.

Two years and a month later, we begin to see the kind of impact it is having. The GST collections for August 2019 have been put at ₹93,960 crore, which is about 4.51 per cent higher than August 2018.

Considering that the retail inflation is 3.21 per cent, the real growth in GST revenue is around 1.3 per cent in an economy which is growing at 5 per cent.

A revenue growth of under 5 per cent would mean that the government would be under stress to meet its obligations to the states, forcing them to either cut down expenditure or borrow more to meet their fiscal obligations, which is primarily kicking the can down the road. We also need to understand that the government’s basic approach to taxation — more so indirect taxation — is deeply flawed, manifest in the rise in service tax rates from 12.36 per cent when it took over to 18 per cent now.


While the government needs taxes for development, a country like India needs to keep indirect tax rates low to ensure that the middle class and the poorer sections don’t get taxed too heavily on their consumption, even as the middle class were given very little relief in direct taxes.

In addition to this, the government has made massive windfall gains through its taxation on petroleum products. Estimates suggest that the government made an extra Rs 11 lakh crore in the first five years and this is going to get much higher in Modi 2.0 because of new taxes in the current budget.

The government had been lamenting about the low tax to GDP ratio in the country and believed that there was a greater potential to raise more taxes, hence more resources for development.

Increasing the tax to GDP ratio could have been done through increased compliance but the government clearly chose to focus on increasing tax rates which meant greater tax burden on the poorer consumers.

The signs of stress are clearly visible as the tax to GDP ratio is on the decline, by the government’s own admission.

The Economic Survey had stated, “Accordingly, gross tax revenue as a proportion of GDP declined to 10.9 per cent of GDP in 2018-19, lower by 0.3 percentage points as compared to 2017-18... Indirect taxes have fallen by 0.4 percentage points of GDP primarily due to shortfall in GST collections. This has been partly offset by 0.1 percentage points increase in direct taxes.”


A couple of months into the budget, the government seems to be in serious trouble because the impact of its economic policies are now visible on the ground, but even now the government thinks that it can spend its way out of trouble.

There are a lot of ‘mega plans’ that are in consideration and this includes a Rs 5 lakh crore plan to expand infrastructure to ‘boost’ the economy.

By not understanding the genesis of the problem, the government is taking steps which may be welcomed by the industry and perhaps even the markets and give the government some breathing space. But besides being too little too late, the prescription is misplaced.

We, the people of India, risk losing our jobs, struggle to keep our children in school and cut down even on basic consumption. But there is little sign that the government realises the importance of reducing indirect taxes on people in order to boost consumption.

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