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A file photo of Kerala finance minister Thomas Isaac (Photo: Mint)
A file photo of Kerala finance minister Thomas Isaac (Photo: Mint)

There is a strong case for fiscal stimulus: Thomas Isaac

  • Thomas Isaac defends his demand for voting in the GST Council and argues that expanding the fiscal deficit at central, state levels is the best antidote for the current economic slowdown
  • It will also give breathing space for the Modi govt to find resources for paying GST compensation to states

NEW DELHI : Deep divisions have surfaced between the Centre and state governments and among states themselves as the sharp economic downturn began to take its toll on their finances. This has proved to be a litmus test for the new federal architecture of indirect taxes, the Goods and Services Tax (GST), as ministers departed from the tradition of consensus to break a deadlock earlier this month by voting on a tax proposal. As the economy shows no signs of an uptick, ministers are now working on fixing the GST, while the Narendra Modi administration is preparing for the second union budget in its second term in office. T.M. Thomas Isaac, economist and the finance minister of left-ruled Kerala, who is known for speaking his mind on fiscal matters, defends his demand for voting in the GST Council and argues that expanding the fiscal deficit at central and state levels is the best antidote for the current economic slowdown. It will also give breathing space for the Modi government to find resources for paying GST compensation to states. Edited excerpts:

The GST Council earlier this month opted to vote on a tax proposal related to lotteries. Many say Kerala demanded voting, a departure from the tradition of consensus-based decision making in the Council. What called for such a shift?

There are two types of lotteries—those directly organised by the state and those run through middlemen. When these middlemen come to other states, our complaint has been that, they break the lottery law, under which all profit is to go to the treasury. There are also conditions to prevent the addiction for lotteries. They violate all these, a matter of political controversy in Kerala for about two decades. We had our laws amended to ban this kind of lotteries under a law related to gambling, a state subject. But this became null and void with GST coming. Therefore, after a long bargaining, we arrived at dual rates which was designed by none other than former union finance minister and the first GST Council chairman Arun Jaitley himself -- 12% for lotteries directly run by state governments and 28% for lotteries run by middlemen in other states. The central government under Jaitley’s term had argued in Calcutta high court in favour of dual rates. The court upheld it and is therefore, perfectly legal. The reason now put forward (at the GST Council) to change this is that North Eastern states will be deprived of the revenue from middlemen running lotteries. We have offered--not once, but twice--to make good the loss suffered by them. We even promised to pay double the amount paid by these operators to North Eastern governments. For us, it is not money, but the law and order problem from these middlemen operating in the state that is the issue. There was nothing legally compelling to change dual rates. When this was treated as the most important GST issue to be addressed at present—it was placed in GST Council agenda after the first item—I was not going to take it lying down. I demanded (voting). It was not that I wanted a vote for votes’ sake. An irrational decision was being made overturning a judgement arrived at after long deliberations. That had to be questioned.

Is the era of consensus-based decision making over?

It will depend very much upon how much the central government is willing to hear states’ views. Arun Jaitley had set the convention of consensus. He would never get irritated by the amount of arguments or the time taken to debate issues. He was accommodative. Now states face serious problems when GST compensation does not come on time. The Centre owes an explanation for delays. At the last Council meeting, I asked for an assurance that the compensation due in December will be made. Whatever is there in the corpus can be distributed on a pro-rata basis. We are not asking for money from the Consolidated fund of India. The request was refused. If this is the attitude towards the rights of states, I regret to say, it will invite confrontation.

Why should states be over-dependent on GST compensation?

Other states could front-load their borrowing to tide over the crisis. However, central government cut our borrowings by 6,500 crores saying we over borrowed in 2016-17. I pleaded that even if it is so, our borrowing should not be cut this year considering the precarious situation we have been through of floods and rehabilitation requirement. But it was not accepted. I am unable to frontload the borrowing and tide over the crisis.

But GST was debated for nearly two decades before its 2017 rollout. States got enough time to put in place economic growth strategies and boost revenues. Did they not?

Before the GST laws were passed, it was discussed in GST Council that the solution to not having enough funds from cess collection to pay compensation was to let the Council borrow with central government approval, meet the compensation requirement and extend cess collection to repay the borrowings. Why in a time of slowdown, when normally states spend more, enforce a cut in their expenditure this way? This is not good financial management. Instead of a counter-cyclical fiscal policy, you are forcing an expenditure cut. This year, there is going to be a decline in the expenditure of states in India, in real terms. GST revenue is going down, devolution of funds to states is declining and states are not allowed to borrow more. So real expenditure has to be squeezed. Can there be a more senseless macroeconomic policy? The Centre can borrow, sell assets or dig into the RBI’s reserves. What can states do? States are sitting ducks.

Why did GST fail to boost revenue collection?

Revenue is not buoyant for several reasons. Firstly, the economic slowdown, which may take some more time to get reversed. Secondly, slack GST administration, which needs be corrected. Besides, GST rates were slashed mindlessly. Because of GST, the tax to GDP ratio in India which is one of the lowest in the world, has come down further. A solution proposed was to have two tax slabs and push up the lowest slab upwards. It is such a negation of the canon of equity. We have revenue problems because we shifted items from the highest 28% slab to lower slabs. To compensate for it, you want to raise the lowest slab (from current 5%). That is unacceptable.

How do you think the economic slowdown should be tackled?

For the time being, let us have a higher fiscal space. I hope the central government will raise its fiscal deficit to 4% of GDP (it is projected at 3.3% for FY20) and allow states too to raise it to 4% of gross state domestic product (GSDP) (from 3%) so that expenditure level is maintained. Every state irrespective of political dispensation has been demanding it. You also announce the flight path to lower it to the normal time 3%. The market will accept it. Everybody knows there is a slowdown and therefore expenditure has to be maintained and that this is a temporary phenomenon. This is the call that the union finance minister should take. The second thing to be done is to expand the Mahatma Gandhi National Rural Employment Guarantee Scheme. This is the quickest way to getting money in the hands of people and to create assets. We should also have an infrastructure stimulus, which can be financed by the expansion in fiscal deficit. (ends)

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