One swallow may not signal a summer, but for the Narendra Modi government, desperately clutching at the slightest hint of a recovery from the prolonged slowdown, the October Goods and Services Tax (GST) figures have come in handy.
With the collections of the most important source of indirect taxes amounting to Rs 1.30 lakh crore, the Union finance ministry immediately seized the data as confirmation that the economy is back on an upswing. The figures were the second-highest ever monthly GST collections, the highest since the Rs 1.40 lakh crore collected in April, the ministry pointed out.
However, it may well be prudent to treat the jubilation with some circumspection. After scaling the peak of Rs 1.40 lakh crore in April, GST revenues collapsed by more than 30% in the following two months (see the accompanying chart). Moreover, the cumulative collections of GST in this financial year, amounting to Rs. 8.06 lakh crore, are just a little under 15% higher than the revenues mobilised in the first seven months two years ago. Since tax collections are always stated in nominal terms, the average annual increase of about 7.5% has barely kept pace with inflation.
A striking feature of the economy during the pandemic has been the loss of its linear growth trajectory. The economy has moved in fits and starts especially because India has been among the most miserly in boosting it through its own spending.
Predicting recovery is hazardous for three reasons. First, as the evidence shows, the collapse of incomes and consequently consumption has been widespread. Second, the unevenness of consumption, spurred by the unequal distribution of incomes and wealth during the pandemic (as illustrated by the runaway boom in the stock markets). Third, since even the consumption of goods favoured by the relatively well-off had been put off during the worst phases of the pandemic, there is bound to be a portion of pent-up demand that gets released at a later time—for instance, during the ongoing festive season.
Recalling the events from exactly a year ago would highlight this rather well. In October 2020, the government paraded the 10% jump in GST collections—compared to October 2019—as evidence that the economy was on the mend. In fact, the then-finance secretary Ajay Bhushan Pandey claimed that the increase in revenues indicated not only that economic recovery was under way but it was on a sustainable footing. Strikingly, then as now, the mandarins in North Block pointed to the rising trend in the monthly generation of e-way bills, the electronic registration of goods movement, as further evidence that the economy was on a path to recovery.
An increase in the volume of e-way bills can “by no means be assumed to necessarily result in higher GST collections”, Abhilash R, a Bengaluru-based chartered accountant, told Newsclick. Since e-way bills are mandatory for the movement of goods, higher volumes only mean goods are on their way to customers. “From a revenue perspective, e-way bills are revenue-neutral,” he explained.
Since e-way bills are generally issued by business-to-business parties and both parties can set off their GST payments, the realisation of revenues only happens when the consumer actually buys the goods; higher volumes of e-way bills are by no means a guarantee of higher revenues, Abhilash added. He reckons that there could only be a 30% correlation between the generation of e-way bills and GST revenues. Using e-way bills as a proxy for GST revenues or to project demand—and hence growth—is thus fraught with serious risk, he said.
Abhilash also pointed to his own experience that higher GST collections could have been significantly influenced by the aggressive tax audits in the last few months. In fact, the ministry has claimed that these measures had helped in increasing the percentage of returns filed since May 2021. However, he pointed out that there are limits to what such measures can yield. More importantly, any increase in revenues from improvement in tax administration would be only marginal, he reckons.
Evidence from other sources also confirms a dimmer view of the economy than what the ministry would have us believe. For instance, recent data on lending confirms that ‘retail’ lending by banks now outstrips lending to industry. Retail lending, a rather expansive term in banking parlance, is for the purchase of consumer durables or homes and also credit card-based purchases. Most importantly, it also includes personal loans.
The government’s persistent insistence on using monetary policy instruments, like by keeping the interest rate low, has diverted bank lending to the hands of wealthy individuals. The crucial point is that none of these have moved the economy out of the rut. Most importantly, the collapse in bank lending to industry not only reflects the unwillingness of bankers to lend but also the lack of desire of industrialists to invest. Where is growth going to come from in the absence of investment is the obvious question
The latest data from the Centre of Monitoring Indian Economy’s (CMIE) Consumer Sentiments Index (for October) refutes the ministry’s claims of recovery. The index (base 100 in September-December 2015) was at 59.4 compared to 105.3 in February 2020, just before the pandemic hit India. The collapse of consumption has important implications for growth. For instance, one of the ways of looking at GDP is to slice it in terms of expenditures emanating from different segments of the economy. Since private final consumption expenditure accounts for almost 60% of GDP, a recovery of consumption is an absolute must for economy recovery to be on a sustainable footing.
Mahesh Vyas, managing director and CEO, CMIE, pointed out recently that consumer sentiment during the weeks before Diwali has shown no perceptible improvement over the last two years. Forget white goods and cars, people are in no mood to even consider buying consumer non-durables—clothing and footwear—in the current festive season. “More than half the households feel that this is a worse time to buy consumer non-durables compared to a year ago,” he said.
It is obvious that the latest data on GST was used by the ministry to spin a narrative in a desperate attempt to boost sentiment before Diwali. As always, reality will soon prove to be a leveller.
Monthly GST Collections
Source: Ministry of Finance
The writer is former associate editor, ‘Frontline’, and has worked for The Hindu Group for over three decades. The views are personal.