One swallow may not make a summer but the Narendra Modi government appears to believe that the slight uptick in collections from the Goods and Services Tax (GST) in October, released on Sunday (November 1), may well be the clincher that the COVID-19-battered Indian economy has finally turned the corner.
It is understandable that after months of bleak forecasts for the economy, and with Diwali just days away, the government would like to grab at anything that would make for a feel-good factor. But several underlying economic factors indicate that some scepticism and sobriety may be in order.
Data released on Sunday show GST collections in October 2020 were 10 per cent higher than collections in October 2019. This came after a 4 per cent uptick in September 2020, when compared to the same month of the previous year.
Union Finance Secretary Ajay Bhushan Pandey has claimed that the increase indicated that the trajectory not only indicated a recovery was underway but that it was on a sustainable footing. He pointed out e-way bill generation increased by 21 per cent in October, which he claimed was evidence that things would improve further in November. E-way bills refer to electronic registration of the movement of goods. They pertain to movement of goods, not necessarily of sales.
Abhilash R, a chartered accountant specialising in indirect tax matters, told The Federal that “a one-to-one correlation” between e-way bill generation and GST revenues would not be a valid assumption to make. His estimate is that there may be only a 30 per cent correlation between the two. He explained that all movement of goods across the supply chain may not reflect a final sale of products.
Abhilash’s contention can be explained by the way vehicles are sold. For instance, it has been widely reported that automobile companies typically dispatch more vehicles to dealers than what they hope to sell. In fact, since the slowdown in the auto industry — well before COVID — this was a major source of friction between companies and their dealers, who protested that they were saddled with excess stocks. More importantly, from a government revenue standpoint, till the vehicle is actually sold to a customer by the dealer, the government does not get the portion of the GST paid at the point of final sale of the vehicle. Using e-way bills as a proxy for GST revenues is thus fraught with risk; it can provide an indictor of economic activity, but it can not be reliably to forecast demand.
An even more serious problem in using October GST collections to build a tale of economic recovery is that it completely disregards the importance of economic trends, especially those arising from seasonality. Despite all the advances India has made, the Indian economy is still subjected to the vagaries of seasonality. In fact, they may be more acutely visible in agriculture, but seasonality plays a role in almost every aspect of the Indian economy.
The seasonality factor
There is a good reason why the major festivals — even festivities in families, such as weddings — in India are centred around the harvest season. The biggest uptick in economic activity in India is in the October to December/January period. And, with the kharif harvest just weeks away in large parts of the country, this is the time when activity picks up. So, a 10 per cent uptick is by no means an indicator of good days ahead.
More importantly, the 10 per cent increase desperately calls for it to be placed in context. The total GST collection between April and October 2020 was about ₹5.6 lakh crore, compared to ₹7.02 lakh crore in the previous year. This implies that cumulative GST collections in the current year were down by one-fifth. Although it is true that the gap between collections made last year and this year has been narrowing, what has been lost is just too much to retrieve.
There is another factor that needs to be considered, especially because of the nature of the COVID-19 pandemic and the way it has affected the economy. The lockdown and the fits and starts of activity since then have meant that much of thee demand that is resurfacing is just pent up demand that was throttled during the lockdown.
There is evidence to show that companies — including the major oil companies — are drawing down inventories to meet demand as the market reopens. None of this guarantees that the same level of sales would continue, unless final demand maintains a momentum in the days ahead. The GST data is simply blind to what lies in store on this front.
Agricultural incomes down
Indeed, data from on another front, provides a completely different picture of the state of the economy. According to the Centre for Monitoring Indian Economy (CMIE), the unemployment situation worsened in October, the same month in which the Finance Ministry claims all has been well with the Indian economy. This, despite the fact that agricultural production, by all accounts, seems to have largely escaped a meltdown.
Available evidence seems to suggest that market arrivals of almost all crops suffered a decline in the Rabi season, despite the harvest itself having been a very good one in most parts of the country. What this means is that although farm harvests were not affected, prices realised by farmers declined significantly. That surely indicates a severe income compression, which is bound to cast a long shadow over demand in large parts of the Indian economy. And, this the reason why it would be illogical to expect the agricultural sector to be the economy’s saviour as some seem to suggest.
There is another aspect to consider. Tax revenues are generally seen in nominal terms. This is because they go towards meeting current expenditures of the government. But taxes are expected to enjoy a certain level buoyancy, in line with the growth of the economy. Seen in this light, the 10 per cent increase, after accounting for the ravages of inflation, would be barely 3-4 per cent. To project a recovery on such slim evidence would not only be foolhardy, it would be irresponsible.
It is evident that the mandarins in North Block, desperate to convey something that would provide cheer in the Diwali festivities that are just days away, are using the GST uptick to spin a narrative that does not sit well with reality. More robust and reliable data may be needed to conclusively establish that this is not just a dead cat bounce for the Indian economy.