GST Uncertainties Make The Possibility Of Another Union Budget In November Higher

A strong case is building up for a fresh budget later this year, thanks to the uncertainties unleashed by the implementation of the goods and services tax (GST) from 1 July. Since there is already a proposal to move the budget year to a calendar cycle (January-December instead of April-March), the ideal time for the switchover is from 2018.

This means terminating the 2017-18 budget by December, which would cover the first two quarters of GST (July-December), and presenting the budget for fiscal 2018 sometime in early November or even late October.

There is good reason to terminate the current budget early since 2017-18 is going to be a topsy-turvy one for fiscal balances.

Thanks to GST, many companies and dealers were busy destocking goods in June, offering big discounts and generally emptying the inventory pipeline. This is one reason why car sales slid by 9 per cent for the top five companies.

And this destocking was not restricted only to cars. The pharma industry, which is generally invulnerable to economic cycles and shocks due to inelastic demand, also went though the same process of destocking before 1 July, according to the CFO of Dr Reddy’s Labs.

GST is a gigantic leap into the unknown, and the hope is that it will deliver higher revenues on a wider tax base in the shortest possible timeframe. But we won’t know this until at least early 2018.

With six tax rates (3, 5, 12, 18, and 28 per cent, and a special rate for luxury items), the Indian version of GST begins with a greater level of complexity than almost any other country, and this will surely lead to many glitches over tax setoff claims and refunds. To make matters worse, GST Network chief Navin Kumar set the cat among the pigeons when he told the media last week that the network had not been finally beta tested. It was tested for the rules known last December, but not for the changes made since then. So, one should expect software trip-ups in the weeks ahead.

The real problems with GST will not be at the consumer end, where it is largely about adjusting to the new taxes, but the integration of millions of small businesses into one tax network that must work error-free to instil confidence in the system. The problems will be in the interface and tax setoffs between upstream and downstream business, and between businesses and the tax network.

But even leaving aside the implementation hassles, we are walking into a period of great economic uncertainty. It may take all of this financial year (all the way till March 2018), or at least till December 2017, before we can be sure we have got GST right.

The main thing economists should worry about is the short-term direction of growth and government finances. This is because even as the slowdown unleashed by demonetisation is still to work itself out, GST has kicked in from the second quarter of this fiscal year (July-September 2017). Since most businesses and retail establishments pushed up sales with huge discounts in June to avoid holding old inventories on 1 July, this means GDP data will be dicey throughout 2017-18.

We cannot know how the destocking operations in the first quarter have impacted gross domestic product (GDP) – the GDP data will come by August-end – nor will we know how fast demand has revived till November-end. Thus we will have two weak quarters, if not three, since the focus is on fixing the bugs in GST and smoothening out the kinks. The government will not be focused on revenues, and industry will not be fully focused on sales at least in the current quarter.

The second quarter (July-September) could thus see a sales drop in many cases, especially as small and medium businesses adjust to the new taxes, as supply chains are rejigged, and as government spending slows down. We can thus expect tax revenues to also slow down. This means we could be heading for higher deficits, even as there is a cacophony of demands for lower taxes in some areas, and small businesses and traders worry about compliance issues.

It is worth noting that many states are already waiving off farm loans or offering interest waivers (UP, Punjab, Maharashtra, Karnataka, and Chhattisgarh, so far), and more will do so in the coming months, with negative implications for the fisc.

It is only in the third quarter (January-March), when GST settles down to some degree of systemic stability, that we can expect some revival in the growth scenario, but we are up against another problem. This is when some of the big bank loan defaults, now pushed to the bankruptcy courts, will be settled, forcing banks to take huge haircuts, and government to shell out large sums for recapitalisation. States will also begin clamouring for their share of revenues guaranteed under GST precisely when the centre will be stretched for resources.

Given this context, it is best to close 2017-18 in the third quarter (October-December being the last quarter) and presenting a new budget for 2018 in November.

The upshot is this: the ongoing fiscal 2017-18 will be a difficult-to-predict economic year, and few forecasts will come true as a lot depends on how GST pans out. One should not rule out the possibility of a huge fiscal deficit far above the 3.2 per cent projected in the last budget, and the markets could be in turmoil as the economic outlook gets hazy, and data starts going haywire.

(A part of this post was first carried in DB Post)