POST COVID ECONOMY, BANKING AND GST

[Dr. Sanjiv Agarwal]

Economy

Indian economy is now on a recovery drive. The figures suggest that it has fared well as against predictions. A GDP contraction of 7.5% is a better picture after witnessing a 23.9% negative growth in June, 2020 quarter. For March-21, people now predict a contraction of 7-9% only. Economists and other agencies have now started upgrading India’s growth contraction for 2020-21 to even a single digit. Although the private consumption is shrinking, manufacturing sector is showing a recovery. It is in fact the time for real stimulus to spur growth in real terms. The Q3 figures may also be optimistic due to festive season, with agriculture showing positive signs. Corporates have also shown signs of recovery.

According to OECD, it is expected that world economy may turn the corners on Covid-19 crises towards the end of 2021. On YoY basis, India’s GDP position has also been upgraded to -9.9% for March, 2020. The only country with positive growth is China (1.8%) as against -4.2% world average. OECD also suggests for India more fiscal measures to mitigate Covid-19 related hardships. Urban poverty, unemployment, environmental degradation etc continue to bother Indian economy. There is also a need for optimal asset / resources allocation.

If we accept what our Finance Minister believes, India may be on the path to economic recovery amid news of Covid vaccine and resultant confidence. The vaccine brings in positivity for people in all walks of life including those in the economic value add process. The economic activity is likely to get much desired traction.

The sectors of economy such as health care, logistics, distribution networks, cold chain management etc shall certainly get a boost in next two years atleast. Infact, Government should take vaccination as a project with desired budget allocation alongwith planned and phased process. There is an upsurge in railway freight, vehicle sales of (other than commercial vehicles). Manufacturing PMI is also in positive now. Overall, the economy appears to be in revival mode but still, not out of red.

Industry is now in expansion mode, employment is picking up, consumption is on a surge, demand for consumer items has been on rise, may be owing to festive season, and services sector is also seeing a demand pull. Capacity expansion and demand for bank loan is a positive sign. With credit off take expected to pick up, it is also expected that debt –GDP ratio will also improve further. This is likely to sustain as private investment has picked up. Credit is likely to match this expansion which will be known in next few weeks. Monetary and fiscal stimulus have also added to as a fuel to economic recovery. NITI Aayog also feels that India’s economic growth is likely to be at pre-covid levels by financial year 2021-22 and that GDP contraction in 2021 may be less than 8%. It is hoped that on better consumer demand, manufacturing sector will further pick up.

The decreased contraction @7.5% in economy in Q2 of current year is a positive sign of economic recovery in major sectors (e.g., cement, steel, etc) which is certainly outperforming the expectations. If GST collection of last two months (October & November, 2020) are any indication, this holds good. The December, 2020 figures are also likely to be higher because of festive season.

Banking

Reserve Bank of India’s bimonthly credit policy on 4^th December, 2020 has shown signs of recovery and its stance towards supporting the economy under revival mode. The basic theme has been to support growth while ensuring that financial stability is maintained. It ensures easy liquidity and promises to take further measures, as may be necessary to provide access to liquidity and easy financing.

It expects economic recovery to be back on track and that it may recover to positive growth in the present quarter (Q3) itself. The policy stance focuses on stress resolution ensuring liquidity, facilitating credit flow to the economy and ensuring financial stability.

It did not change interest rates as well as repo rate @ 4% , the rate at which RBI lends to commercial banks. Reverse repo rate, rate at which banks lend to RBI is also unchanged @ 3.35%. RBI reiterated that it will continue with accommodative stance in current and next financial year. It will take steps to revive growth on a durable basis and mitigate Covid-19 impact, besides keeping inflation in control (6.8% expected in Q3). Inflation control is also on its priority. GDP has contracted only 7.5% in July-September 2020 as against 23.9% in Q-1 of this year.

The other measures include improvised corporate governance and risk standards, dividend policy to be revisited, severe punishments to improve consumer protection, prohibiting regional rural banks to participate in money market, strengthening technology and digital platforms etc.

RBI policy assures further steps to ensure liquidity for stressed sectors to sustain growth, whenever needed. This signals that liquidity will not be a challenge for a continued economic recovery.

Controlling UCBs and NBFCs

RBI has also decided to enhance regulatory oversight on large Non-Banking Finance Companies (NBFC) and Urban Cooperative Banks (UCB) including risk based audits, appointment of statutory auditors and strengthening lines of defence for commercial banks, UCBs and NBFCs. Thus, there will now be a unified supervisory. This is likely to bring in robust regulatory and supervisory controls, besides transparency and efficiency in the banking and financial system.

Curb on Dividend

There is a bad news for investors. RBI has advised banks not to declare any dividends for the financial year 2019-20 in view of Covid pandemic, which has caused stress and heightened uncertainty amongst banks. Banks need to conserve capital to absorb losses and support economic sustainability. Financial performance of banks has also been one of the reasons.

RBI will have to address the issue of rising inflation in coming months, given that banks have adequate liquidity on hand. The nature of inflation, supply constraints which are keeping the prices higher, behaviour of inflation in next few months, effect of vaccine on inflation etc all will have to be seen. The risk of inflation is another potential risk as it would affect policy also.

Goods and Services Tax (GST)

CBIC has issued a notification for waiving penalty for non-compliance with dynamic quick response code till 31^st March, 2021 which is mandatory for companies having turnover of over ₹ 500 crore for digital payments. Mentioning of 8 digit HSN Code for specified chemical and plastic items has also been mandated. CBIC has also issue SOP for tax officials to deals with fake invoice menace, in the wake of rising fake invoice cases (about cases 1000 cases and 100 arrests so far). This will involve physical  verification of entities in case of deemed registration. This is aimed to counter fake invoice frauds, availing fraudulent ITC and curb malpractices. It is estimated that GST fraud in last three years is to the tune of ₹ 1.20 lakh crore. It is high time that government cracks down mercilessly on fraudsters and also ensure the plugging of GST leakage. CBIC has also decided to send reminders to defaulters who have not filed GSTR-3B by way of emails and SMS.

GSTN has been updating its procedures on the GSTN portal, latest ones being on auto population of e-invoices details on GSTR-1 form, online filing of application (Form GST EWB-5 by taxpayer for un-blocking of E-way bill generation facility etc.

The gross GST revenue collected in the month of November, 2020 is ₹ 1,04,963 crore of which CGST is ₹ 19,189 crore, SGST is ₹ 25,540 crore, IGST is ₹ 51,992 crore (including ₹ 22,078 crore collected on import of goods) and Cess is ₹ 8,242crore (including ₹ 809 crore collected on import of goods). The total number of GSTR-3B Returns filed for the month of November up to 30th November 2020 is 82 lakhs.

For third consecutive month, Tamil Nadu has showed double digit growth in GST collections which indicates economic recovery in the State which is a leader in manufacturing sector. Gujarat / Andhra Pradesh have also shown double digit growth. Increased collection is only indicative of start of economic recovery. However, few states have not shown positive growth (Maharashtra / Karnataka).

Compensation Cess

With Jharkhand state also accepting first option to meet shortfall of compensation cess, all 28 States and 3 Union Territories have accepted the Union’s offer to borrow 1.1 lakh crore on behalf of states to meet ₹ 2.35 lakh crore shortfall. The Central Government has already borrowed an amount of ₹ 30,000 crore on behalf of states.

With this, Compensation Cess controversy has been put to rest, for the present. The instant borrowing is not likely to have any adverse impact on the central fiscal deficit as it will be reflected as capital receipt of the State Governments as a part of financing of the respective fiscal deficit. Therefore, this specific borrowing does not go into general government borrowings, i.e. debt of the centre / states.

It is hoped that going forward, India economy will show brighter signs of recovery with investment, consumption and agricultural production going up. Better covid management will also add to medium to long term advantages. GST procedures and GSTN interface still leave a room for improvement.