GDP slump will hit $5 trillion target, warns NITI Aayog

Syllabus subtopic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

News: The road to a $5 trillion economy by 2025 is beset with many speed­breakers, the NITI Aayog has warned the government.

Prelims and Mains focus: about the recent economic slowdown and its implications on India’s roadmap for $5 trillion economy by 2025

Background:

Finance Minister Nirmala Sitharaman, in her July 5 Budget presentation, had said the government would work to make India a $5 trillion economy by 2025.

Reasons given by NITI Aayog

• The Aayog said nominal GDP growth — a measure of growth without accounting for inflation —has to be at least 12.4% on average if that target has to be reached, according to a presentation made by its CEO Amitabh Kant at the November 8 meeting of the Standing Committee on Finance, chaired by former Union Minister and BJP MP Jayant Sinha.
• The current rate was a mere 8% in the first quarter of the current financial year
• In his presentation, Mr. Kant said “domestic investment and consumption” are the only dependable drivers for sustainable re­acceleration (of the economy). “However, deceleration in investment is visible, primarily in the household sector, due almost entirely to real estate,” he pointed out.

• The slowdown in the domestic market is also because of limited availability of capital with the banks which are tied down due to high non­performing assets in heavy industry and infrastructure.

The government is expected to release data for the second quarter ( July to September) later this month. Experts estimate that growth will dip in Q2 compared to Q1.

15th Finance Commission seeks say in GST Council amid Centre-states row

Syllabus subtopic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

News: Fifteenth Finance Commission (FFC) chairman N.K. Singh on Friday sought a leverage with the Goods and Services Tax (GST) Council, arguing that tax rate cuts and grant of exemptions decided solely by the council affect the FFC’s goal of optimizing revenue targets of the Centre and states.

Prelims and Mains focus: on the Centre-states tussle related to GST and the role of the Finance Commission

Context: The Centre and state governments seem to be on a collision course amid a sharp economic downturn that has eroded their financial positions.

Background:

• The Narendra Modi government is facing the challenge of finding the money for higher welfare spending on schemes such as farmers’ income support, as well as the burden of compensating states, when its own revenue growth is sluggish.
• The FFC recommends a formula for sharing the Centre’s direct and indirect revenues, barring cess.
• The funds needed for compensating states for their GST shortfall are raised through a GST cess on items like tobacco. The central government needs to give GST compensation till 2022, the fifth year of the indirect tax reform.
• The FFC’s formula for revenue sharing is effective for five years from April 2020. An extension of GST compensation to states beyond 2022 will impact the last three years of the period, for which FFC’s recommendations will apply, that is between FY23 and FY26.

Concerns raised by 15^th FC:

• Finance commissions look at projections of revenue and spending, but GST rates, exemptions, changes and implementation are the domain of the GST Council. This leads to unsettled questions on the ways to monitor, scrutinize and optimize revenue outcomes.
• The demand from states for extending the GST compensation given to them for revenue shortfall beyond the currently agreed 2022 will also have a bearing on the formula the FFC is set to recommend shortly on how the Centre should share its tax revenue with states.

Significance of FC comments

• Singh’s comments assume significance as they indicate that the FFC’s suggestions for revenue sharing could be more tight-fisted than states expect, which could trigger more friction between the Union and state governments.
• Singh also called for a fresh look at Schedule 7 of the Constitution that assigns lawmaking powers on various subjects to Central and state governments. “The facts and circumstances on fiscal federalism have changed. Time to change our mind,” Singh said.

Singh argued that the nature of governance has changed fundamentally, with the Central government taking the lead in several national priority areas such as drinking water and power supply. He also said an expert group should look into rationalization of centrally-sponsored schemes.