Modi Government’s Sleight-of-Hand
Prabhat Patnaik
THE Modi government has made much of the revision in rates of the Goods and Services Tax that it has announced. Its propaganda machine has worked overtime to tom-tom the benevolence of the government, how it has lightened the load on the common man precisely when the common man needed it the most, that is, during the festive season. Every coach in the Delhi metro has multiple government advertisements, with pictures of Modi and of the Delhi Chief Minister Rekha Gupta, claiming that 390-plus goods have become cheaper because of the GST revision. Union Finance Minister Nirmala Sitharaman has been repeatedly claiming a sizeable increase in Diwali sales. And newspapers are full of accounts of an uptick in automobile sales because of the fall in auto prices made possible by the revision in GST rates.
All this however relates at best to only one-half of the picture. The other half which is kept carefully hidden relates to the consequences of the fall in government revenue because of the GST revision. Many government economists are sanguine enough to suggest that there would not be much loss at all; they claim that the increase in sales of goods and services because of the fall in their prices where the rates have been cut, will entail virtually the same revenue despite the rate cut. But this is an impossibility as the following example will show.
Consider a good where the pre-GST price was Rs.100 and on which there was 28 percent GST earlier but 18 percent now, and let us assume for simplicity that its pre-GST price remains unchanged (we can for instance take the production of the good to be vertically integrated). Its price then which must have been 128 before the rate cut, falls from 128 to 118 because of the rate cut, that is by about 8 percent. For the revenue from it to remain unchanged, that is, to remain at 28 where it was earlier, instead of 18 to which it has fallen now at the old level of sales, its sales must now become 28/18 times what they were earlier; that is, they must increase by 56 percent. For an 8 percent fall in price to bring about a 56 percent increase in demand, the price elasticity of demand for this good must be as much as 7, which is an absurdity. Hence the undeniable fact remains that there would be a significant loss of revenue because of the cut in GST rates.
Of course, in the case of durable consumer goods where consumers buy such goods at discrete intervals, it is not implausible that there may be a bunching of purchases by several individuals immediately after the announcement of a price-fall, so that there might not be an immediate fall in the revenue from such goods (and there may even be a rise) following the GST rate cut. But this only means that the effect of the rate cut in such goods may not be visible in one period; it will only become visible over time when the effects of a possible bunching of purchases have worn off. The bunching effect in other words must be separated from the question of price elasticity of demand. To conclude from the immediate rise in automobile sales and the boost to government revenue from this source that the GST rate cut will have no effect on government revenues at all is utterly erroneous. A loss in revenue in short is inevitable.
This loss would have to be shared between the central and state governments, but this is an issue we will come to later. This loss could in principle be offset by additional tax revenue mobilisation through some other means by the central government. But in such a case, given the fact that the central government would not be levying such additional taxes on the rich whom it pampers on the grounds that they promote “development”, the additional tax revenue would have to be mobilised at the expense of the working people, in which case the government’s claim of putting additional purchasing power in the hands of the common people, would have been blatantly falsified; the government would seek to avoid such blatant falsification of its claim and hence eschew such additional revenue mobilisation. And in any case there is no such proposal being mooted.
Likewise, there is no possibility of enlarging the fiscal deficit: the states would not be allowed to do so anyway, and the centre is currently engaged in the task of bringing down its fiscal deficit as a proportion of GDP, a task it certainly would not abandon. It follows therefore that the GST rate revision will necessarily be accompanied by a reduction in government expenditure.
This reduction will typically affect whatever remaining government spending still occurs on healthcare, education and other such government services. Already there has been extensive privatisation of such services; this process will now be carried further as a consequence of the GST rate cut. Since such services provided by the private sector are much more expensive than similar services provided by the government, the people will have to expend much larger purchasing power in buying these services now. The purchasing power that the government has made available to the people through the GST rate cut will thus be offset by the purchasing power they would be losing because of the government’s cutting down its expenditure on such essential services. What the government has given with its right hand in other words will be taken away with its left hand.
But that is not all. Among the beneficiaries of the GST rate cut, there would not only be ordinary people but also the affluent, as is evident from the reported increase in automobile sales following the cut; but the victims of the cut in government expenditure that would be necessitated by the rate cut, would be predominantly ordinary people, since the affluent scarcely access government services in healthcare, education and such like. Even if the expenditure cuts occur not in these sectors but in other sectors, such as through delays in pension payments, or delays in wage payments under MGNREGS, the same conclusion holds, namely that the victims would be the non-affluent ordinary people. The net effect of the entire exercise therefore would have been a redistribution of income from the ordinary people to the relatively more affluent, that is, an accentuation of real income inequalities in our society.
But the trick of the government consists in the following. The GST rate cut is direct and immediately visible, while the cuts in government expenditure necessitated by such a rate cut are not immediately visible, and, when they do occur, are likely to appear unrelated to the GST rate cut. The government therefore can derive much propaganda mileage from the GST rate cut, without attracting the opprobrium that should be its due because of the expenditure cuts that are essentially a consequence of this GST rate cut. Even a measure that actually increases real income inequality in society is presented as, and also appears as, being beneficial to the poor and implemented in their interest.
The point here is not to criticise the GST rate cut as such; but to underscore the fact that any such rate cut, must be accompanied by an equivalent increase in resource mobilization at the expense of the rich, a matter that is squarely within the domain of the central government.
Since this is not going to happen, and hence no question of any proceeds of such additional resource mobilisation being shared with the states, the GST rate cut will also make state government finances even more precarious. They would suffer from a loss of revenue because of the rate cut, but will obviously not be cutting down on expenditure on services meant for the ordinary people, since, unlike the centre, they are much closer to the ordinary people. They do not have the capacity to raise additional tax revenue and they cannot increase their fiscal deficit. The net result therefore will be an acute worsening of state government finances.
The Modi government in short, while claiming credit for the GST rate cut, carefully camouflages the fact that when we look at the totality of the picture that would emerge from this tax cut, we would find a rise in real income inequality, and a further squeeze on state government finances.
