Interview | GST has birth defects; positive nominal growth in FY21 possible: NR Bhanumurthy

Given the kind of fiscal and monetary measures taken by the government and the Reserve Bank of India (RBI) to tide over the economic fallout of the COVID-19 pandemic, India might see a positive nominal growth in its Gross Domestic Product (GDP), according to senior economist NR Bhanumurthy.

"It's unfortunate that all the analysts and agencies are revising the GDP growth downwards after the first quarter numbers came up. My problem is, for the first quarter I don't think anybody expected anything better than what we have seen right now," Bhanumurthy, vice-chancellor, Bengaluru Dr BR Ambedkar School of Economics (BASE) University, told Moneycontrol in an interview.

Most rating and research houses, and even the RBI, have revised India's real GDP growth estimates for FY 2020-21 downwards after the first quarter's figure came out. Fitch now expects the country’s GDP to contract 10.5 percent in FY21, against its earlier estimate of 5 percent contraction. Goldman Sachs estimates a sharper contraction at 14.8 percent, revised from a 11.8 percent degrowth forecasted earlier.

Edited excerpts:

Q: What's your assessment of the LTC scheme and the festival bonuses announced? Do you think it will be able to boost demand?

A: I think there is a consensus among economists that the government needs to spend upfront to create demand in the economy for various sectors. To do this, it would have meant that the government might have had to take pressure on the fisc by additional spending in public expenditure. That would have had adverse impact on other parameters like borrowing programs, public debt, fiscal deficit, but most importantly, on inflation.

So to overcome all this, what the government has done is frontloading some of the planned expenditure for the current year so that at least during the festival season, there will be a revival in the demand, but at the same time, there would not be much inflationary pressure, as well as the fiscal situation.

Q: The government sector is probably the only sector where employees have been protected - there hasn't been a pay cut or retrenchment. But the overall demand situation in the economy right now is very bleak. Is there an appetite to consume more in this period in a way that it can sort of revive economic activity?

A: Personally, yes, especially during festival season. We generally used to have a larger demand during this time of the year, compared to the other seasons. What happened in the current year is that, because of the lockdown, there is an increase in the precautionary savings.

Even for government employees, I think the discretionary consumption has actually collapsed. The only consumption that is happening is non-discretionary. These policy measures by the government might nudge, in a sense, although they're not expecting every government employee to consume like that.

Even if a part of the government staff utilizes the benefits, there would be some impact on key sectors like automobiles and the real estate sector, in the section that is called white goods.

These measures don't put any additional burden on the exchequer, but it can frontload the demand. As rightly pointed out, this section of employees have not seen any pay cuts and this segment needs to start consuming, so that there will be a cascading impact on other segments and sectors.

Q: Given what has happened in the Goods and Services Tax (GST) Council between the Centre and some states, and what some states are doing to soften the farm bills passed by the Centre, is the whole concept of cooperative federalism under threat?

A: We got into the GST structure, which is that of 'one nation - one market'. So if that is threatening cooperative federalism, I think then one may want to have a look again at it. But we all hailed GST as one of the major economic reforms since Independence.

Having said that, most importantly, I think GST has some birth defects, especially this 14 percent compensation (due to states). I thought that was that was really the reason for this whole controversy under the GST compensation.

It's absolutely difficult for any country to keep registering the nominal GDP growth rate (say at 14 per cent) where your revenue also grows at 14 percent (assuming a revenue buoyancy of 1) every year. So that's the problem with the existing GST structure.

As I said, this institution called GST is still evolving. Going forward, and with the lessons that are learnt since implementation, we should be able to have a slightly better GST structure in terms of both collection, taxation, tax rates, tax coverage, sharing of taxes etc.

Q: Do you think there is a need to re-look at a revision of GST rates?

A: What we have been doing doing till now is tinkering on the rates. It's almost like every GST council meeting would turn out to be one budget. In the past we used to wait for the budget to look at what kind of tax structure to be there for our consumption. That is not the kind of GST structure we need.

What is important is to have a predictable tax structure. I think that is what we are looking for. We should have one nation one tax, one market, that is the ultimate goal of the GST.

But I think there is some merit in re-looking at tax rates for some of the commodities. Ultimately, it comes back to the consumption basket of segments of the population. I think the current GST structure is trying to reflect the consumption basket. It is trying to reflect the consumption basket of various class intervals of population's consumption.

But problem is, the information about the consumption basket itself seems to be very dated. We don't have consumer expenditure survey after 2011-12. That itself may be leading into some problems for us when we are fixing the taxes for different commodities and services.

I think what is important here is the information on household consumption behavior if you want to really fix taxes. That is entirely missing in the country. If you look at countries like the United Kingdom or others, they will tell you what is the consumption pattern of each and every household groups at a micro level.

We don't have that structure and information. The consumption basket of various groups of households should help in fixing your tax structure... right now, the existing structure appears to have a contractionary impact on growth.

Q: Most ratings agencies have revised India's GDP forecast. Where do you see India's growth at in FY 2020-21?

A: It's unfortunate that all the analysts and agencies are revising the GDP growth downwards after the first quarter numbers came up. My problem is, for the first quarter I don't think anybody expected anything better than what we have seen right now. That is largely because of the lockdown.

After that, there are many things that happened. We have already seen how the fiscal and monetary policies are trying to help ease the slowdown. We have already seen the Aatmanirbhar Bharat package, even out of that we have seen how the states are spending. And given all these things, further downgrading was certainly not consistent.

The forecasts are always conditional upon some of the policy interventions. I'm not saying that we are going to see a positive real GDP growth next year. But I am going to bet on positive nominal GDP growth in the current fiscal year.

That means that even if inflation is 6 percent, my real GDP growth cannot be lower than -6 percent.

The first impact of all these fiscal measures would be on demand. So that shows only on nominal GDP growth. The measures are supposed to be for both demand as well as supply. We think if we increase the fiscal policy measures, then the real GDP growth will go up. No, it's not automatic.

If you increase public expenditure, the nominal GDP growth increases first, the demand will revive. Now in that kind of situation, if the supply side doesn't respond, the real GDP growth will not change even if you provide higher fiscal support.

The increase in the nominal GDP growth, with less response from supply side, will lead to an increase in inflation without any impact on the real GDP growth. I am afraid, this is what is seems to be happening right now.

We have seen a sustained increase in the inflation numbers for months now. We have seen seven plus inflation without any impact on the real GDP growth right now.

In the current context, for us, what is more important is focusing on balancing nominal GDP growth and inflation. Fiscal measures shouldn't only lead to higher inflation.

This year, given the kind of fiscal measures as well as the monetary measures, my own assessment is that we are going to see a positive nominal GDP growth.