GST pains and gains

As the GST bill gets closer to its passage in the RS (where BJP is in minority), focus is shifting the the economic spin offs and benefits. One major industrialist called it a ‘brahmastra’ (a celestial weapon from Hindu mythology) for the Indian economy. Perhaps he overlooked the fact that brahmastra was used for destroying, not improving lives!

Be that as it may, there are also concerns that GST may give more pain than gain in the short term, even medium term. Examples of Malaysia are being cited where inflation shot up by 2.5% for a couple of years. Media reports are even saying this would benefit the Congress in 2019. Given the chaos, screw ups, poor planning and execution that features in almost every project run by Indian babus, it is entirely possible that positive effects of GST will be pushed back even further while teething issues are sorted out. And electorates are famous for their unforgiving focus on the here and now.

This is where the NDA government and PM Narendra Modi face a huge dilemma. It’s a big test of their leadership and courage. Should they implement GST ASAP and “pay” the ultimate price in 2019? Or just hope that things will work out by some miracle? Or perhaps do some creative thinking and plan ahead?

GST1

Learn from others, think ahead

It is safe for Arun Jaitley & co to assume that the first few years will be chaotic. It is also perfectly safe to assume that any inflation, even regular one or those caused by monsoons, dollar rate, oil price or whatever will get assigned to the GST by the hostile media and naturally the opposition. Perceptions do matter in politics and all is fair in war and love.

But all is not lost. There is a great opportunity for Narendra Modi to kill several birds with one stone. He was lampooned in Bihar recently for ’empty’ Jan Dhan bank accounts. He has been facing criticism for not being “bold” enough on reforms.  He does not even have to invent any innovative solution! Singapore has been there, done it and there is no harm copying good things!

Singapore implemented GST in 1994 and it did something very clever – it simply gave cash to each citizen with “GST credit” that compensated for extra cost incurred by lower income families, since GST is by nature regressive. This was carefully targeted and benefits were maximum for lowest income families.

GST credit subsidy direct to Jan Dhan Bank accounts

The suggestion is simple. Crores of Jan Dhan bank accounts have been opened. Modi should simply announce that for first 3 years, Central Government will credit an amount into each beneficiary account that roughly compensates for any additional inflation caused by GST. Instantly he can transform crores of ‘aam aadmi’ that knows nothing about fiscal, taxation policy or GST, cares only for his family and its finances, into grateful supporters of an idea that benefits the economy in the long run.

This need not be a huge fiscal burden. Let us do some back-of-envelope maths. The poor and middle class spend, say, Rs. 5,000 per month on essentials. That’s Rs.60,000 per year. 5% of that should more than compensate any GST impact. That’s Rs.3000 per family. If there are 10 crore families (not individuals) that need help, that’s Rs. 30,000 crores. This is a very liberal estimate since 10 crore families will cover about 40-50% of the population and Rs.5,000 itself is a high number. And yet is peanuts compared to money spent on schemes like MNREGA which didn’t do either the economy or the UPA any good. If needed, funds can be diverted from such wasteful schemes to this subsidy.

The biggest problem of the Indian economy, has been that Prime Ministers and ruling parties have rarely made an effort to sell the benefits of reforms to the common man on the street. Most reforms have been by fiat and stealth. This also means that they cannot even openly take credit for doing a good job on reforms.

Today we have a PM who can communicate well and is certainly not tongue tied. Why not go to town with GST and the subsidy to sell painful but necessary reforms in general to the general public? He may find that the poor voter is clever enough to understand if only it is presented to him in a proper way. And he is not ideologically closed minded or biased, something you can’t say of our TV studio liberal elites.