Looking back on 2020, there were three major developments involving the Government – two in the policy domain and the third in ideology, with a success rate of 2/3. Therefore, from the point of view of the Government, there was reason to be satisfied, given that conditions were tough.
Let us look at the success stories. The first was the 'Atmanirbhar' package announced by the Finance Minister in three tranches, over a period of seven months. The significant part was that there was close working with the Central bank and the two were able to add value to each other’s contribution.
'Atmanirbhar' package
The package was complete, with the Government combining immediate relief for the poor with medium to long-term policy changes that were part of what could be called a new set of reforms. To enable enterprises to function better, be they SMEs or NBFCs or DISCOMs, the government had various schemes to enable the flow of credit. This was done through direct guarantees and the RBI chipped in with the LTRO operations, as well as OMOs, to ensure that liquidity flowed in the system. There was perfect synchronisation between the fiscal and monetary arms, which was commendable.
In fact, when the ELCGS had a buffer of Rs 1 lakh crore left, the government allowed the 26 vulnerable sectors identified by the RBI to be included. The RBI topped this with its latest policy initiative of letting these sectors be covered under the on-tap TLTRO operations.
GST dues
The second was the rather acrimonious debate on the GST compensation. The issue was linked to the slowdown in the economy, which led to lower consumption and also GST collections. Under the terms of engagement of the States with the Centre on the GST, it was assured that there would be compensation for any loss of revenue based on an assumed 14 per cent growth in tax revenue.
In the current year, there was a shortfall in consumption which affected the Centre’s and States’ GST collections. Also, the cess collected on certain products, which went into the cess fund, was inadequate. The States did not want to borrow from the market because typically, they pay 50-75 bps more than the Centre. Besides, the opposition-ruled States felt that they legitimately had to get money from the centre. The Centre argued that the terms of engagement spoke of a compensation being given from the fund and if it was empty, it was no responsibility of the Centre.
Finally, the Centre decided to borrow Rs 1.1 lakh crore from the market and then use the proceeds to compensate the States. The latter would have to treat it as debt but would service the debt with future inflows from the compensation fund. This also means that the compensation cess would continued to be levied for an extended period of time.
Deadlock on farmers' stir
The third relates to the farmers' protest, where there is a deadlock. Ideally, these reforms could have been packaged within the Atmanirbhar schemes but would have caught less attention. However, politically, it made sense to announce it as a standalone reform as it would click with the entire community, if taken in the right spirit. Quite clearly, the government did not expect such opposition to these bills or could have even deferred taking this decision, as the implications are more long-term rather than immediate.
The farm laws are progressive, and the opposition appears to be politicising the issue based on hypothetical outcomes relating to the dismantling of the MSP scheme. These three bills, simply put, said the following: Farmers were no longer compelled to sell in the mandis but could do so outside, in notified areas and would not have to pay any tax. The opposition has argued that in course of time, the mandis would disappear and that the corporations, who would be the buyers, would take the farmers for a ride.
The second was that contract farming was to be permitted and the rules of engagement were notified to ensure that in case of any exploitation, the court could intervene. Again, this has been interpreted as being a case where corporates would cheat the farmers and pay a low price. Such a conclusion assumed the naivete of the farmers, which is not the case.
Last, the government spoke of repealing the ECA, with bans on stocking at both, the wholesale and retail ends, being removed, except under extremely compelling conditions. There can actually be no quarrel on any of these laws.
However, the opposition has interpreted these laws as being a case of corporate entities taking over agriculture and the farmers being driven out of their lands, as the MSP would cease to exist in course of time.
This will be one dispute which will be carried forward into the New Year, as the farmers are unwilling to relent and the Government sees no rationale in diluting the provisions in these bills.
Overall, it has been a tough year for the Government to get the right set of policies to tackle the pandemic without jeopardising fiscal prudence and has been handled quite satisfactorily. The GST compensation could have been worked out earlier, to avoid the subsequent bitterness. The famers’ reaction evidently is not just being driven by economics, as the present demonstration was delayed and came much after the bills were passed. This will continue to resonate some more in 2021.
The writer is Chief Economist, CARE Ratings and author of 'Hits & Misses: The Indian Banking Story'. Views expressed are personal.
