The Covid-19 pandemic shows no signs of fading away, even after ravaging humanity for the last eighteen months. Softening its depredations periodically, it lulls us into complacence ~ only to come back to continue its devastation with renewed fury. The occurrence and recurrence of Covid-19 remains a mystery; the epidemiology of coronavirus has not been fully understood, even by the most learned scientists.
For India, the Covid-19 pandemic has proved disastrous, both economically and socially. Our economy slipped into recession for the first time ever, when we recorded negative GDP growth in the first two quarters of FY 2020-21. For the entire financial year 2020-21, we had a negative GDP growth of 7.3 per cent ~ the first time since 1979. Common people bore the brunt of the economic slowdown; 23 crore Indians were pushed back into poverty, with a 15 per cent increase in the poverty rate in rural areas, and a 20 per cent increase in urban areas. Disturbingly, unemployment has soared to 12.2 per cent.
With varying levels of lockdown imposed in most States, daily labourers are out of work, migrant labour have returned to their villages, pensioners have seen their meagre incomes shrink because of low interest rates. On the other hand, the earnings of the uber rich have grown exponentially, India has added 55 billionaires in 2020, and Mukesh Ambani and Gautam Adani are now the richest persons in Asia, upstaging their Chinese counterparts.
Probably, the strategy of achieving rapid growth, financed by cheap credit to big businesses, so assiduously promoted by successive Governments, has failed to achieve its purpose. Rather, most bank-financed businesses have gone kaput, bringing the banking sector to its knees. The RBI appointed, KV Kamath Committee, which worked out the financial parameters for loan restructuring, has concluded that 72 per cent of banking sector debt worth Rs 37.72 lakh crore was under stress.
Further, according to the Committee, the coronavirus pandemic is not solely responsible for the stressed loans; Rs 23.71 lakh crore, or 45 per cent of banking sector debt, was under stress even before Covid-19 hit the economy. All these stressed bank loans are, ultimately, to be paid for by the Indian public through taxes like GST, VAT and Income-tax. The repeated moratoriums on loan recovery have only postponed the bad debt problem which would hit us once the moratoriums run their course.
In fact, the availability of easy credit has prompted many promoters to overvalue their assets and then borrow to the extent of their actual investment, leaving them with no financial stakes in their enterprises. More dishonest promoters have borrowed against non-existent assets or have fraudulently disposed of their assets and hotfooted to foreign shores. The interest cost on borrowed funds ensures that only established and well-run businesses can thrive; investors flock only to such enterprises, an example being the Reliance group that has attracted approximately Rs.2 lakh crore of foreign equity investment in the last financial year.
Some policy changes may be required to rejuvenate the economy, the first being to remove the focus from big business and promote small enterprises, primarily, by reducing their burden of taxation. As of now, the tax structure favours the rich; the rate of taxation on firms and individuals is almost double the corporate tax rate. Given the heavy statutory compliance burden on corporates, most small businesses are organised as firms, the smallest ones being proprietary concerns, which results in a higher tax burden for small businesses.
Giving relief to firms by bringing income-tax rates for firms on par with those of corporates, would not cost much to the exchequer; Income-tax Departmental statistics for the assessment year 2018-19 show that the aggregate tax liability for 12,69,736 firms was Rs.42,993 crore while aggregate tax liability for 8,41,942 companies was Rs.4,31,041 crore. Thus, halving the tax rate for firms would result in an outgo of less than Rs.20,000 crores.
The trend of Income-tax collections reflects on the present anomalous taxation structure. As on today, after many years, Personal Income-tax collections exceeded Corporate Tax collections. We seem to have reached the stage where Warren Buffet noticed that his secretary was paying tax at double the rate at which he himself was paying tax. According to CMIE data, the profitability of listed companies grew by 212.4 per cent in the last quarter of FY 2020-21, while their revenues increased by 14.7 per cent, but corporate tax collections declined by 18 per cent in FY 2020-21.
Earlier, due to the lowering of corporate tax rates in Budget 2019, collections had fallen by 16 per cent in 2019-20. In all, corporate tax collections have fallen by more than 31 per cent since 2018-19. On the other hand, Personal Income-tax collections increased in FY 2019-20 and went down only marginally (by 2.3 per cent) in FY 2020-21.
Then, GST at high rates on a number of essential goods and more particularly the extortionate levies on petroleum products have fuelled inflation and hit the poorer segments of society badly. To control inflation and maintain social equity, GST rates need to be reduced.
Moreover, the Government should stop favouring business over agriculture. After Budget 2019, the FM announced a reduction in corporate tax rates, providing a relief of Rs.1.40 lakh crore to corporates, thereafter, the FM also gave further relief of Rs.2 lakh crore to the business sector. Tax rates for Foreign Portfolio Investors were also cut. On the other hand, out of an allocation of Rs.3.34 lakh crore in Budget 2019 for agriculture and allied activities, only Rs.2.35 lakh crores was spent. Around 80 per cent of the stimulus of Rs.25 lakh odd crore announced by the FM from April to November 2020, had gone to MSMEs and corporates. The cash component of the stimulus of Rs.4.30 lakh crore for farmers was only Rs.50,000 crore, which was only half of the Budgetary shortfall of Rs.99,000 crore.
Despite the step-motherly treatment meted out to it, the agricultural sector was the only sector of the economy that withstood the vagaries of the Coronavirus scourge, growing by 3.4 per cent in FY 2020-21, when other sectors floundered and the economy shrank by 7.3 per cent. Demand for tractors, agricultural implements, fertilisers etc kept the cash registers of many manufacturing concerns ringing. Exports of agricultural commodities rose by 22.62 per cent in FY 2020-21, to Rs.3.05 lakh crore – at the time when overall exports declined by 7.3 per cent.
In these circumstances, we should be doubly cautious in the implementation of the Farming Acts because agriculture employs 45 per cent of our population and the US model which we want to copy through the Farming Acts has little use for manpower – the USA has only 20 lakh farmers for a population of 33 crore. So, we have to take care that the Farming Acts do not end up eliminating farmers. Moreover, modern mechanised farming has an environmental downside; typically, those engaged in farming as an industry practice monoculture with the aid of large doses of chemical fertilisers and pesticides that degrade farmland and exact a huge cost on the environment.
A better course could be to put aside the Farming Acts for a while, and provide farmers with the markets, expertise and finance for diversification of crops and the ability to grow non-traditional crops. To make agriculture remunerative, instead of increasing MSP, the Government can implement the comprehensive Swaminathan Report on Agriculture of 2006, which earlier regimes had failed to do. Indeed, if sufficient money and sincere efforts are put in by the Government, farming could be rejuvenated without seeking private investment in agriculture.
Sadly, the Atmanirbhar Bharat initiative has failed to enhance manufacturing substantially or increase employment. Even otherwise, large-size modern manufacturing facilities are mostly automated and do not have a significant labour component. So, a rethink of our industrial growth strategy is required. We have to think small rather than big; incentivising small businesses that are employment intensive can boost both employment and the economy. Instead of frying pakoras, with technical guidance and adequate capital, our vast army of unemployed engineers can set up small technical units which could re-energise the economy and provide gainful employment to many. Another idea worth exploring, is the promotion of agro-based, export-oriented industries to dovetail with the farm sector. Such synergy would prove beneficial to the entire economy.
“When the going gets tough, the tough get going” is an old saying, the time to put it in practice for the Indian economy has come now.