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Kerala finance minister's advice to Centre: Cut cess, not taxes

Even as the next GST Council meeting is scheduled for September 20, the possibility of a wide ranging tax cut - to infuse growth into India's slowing economy - looks unlikely, says T.M. Thomas Isaac, Finance Minister of Kerala

twitter-logo Joe C Mathew        Last Updated: September 19, 2019  | 23:39 IST
Kerala finance minister's advice to Centre: Cut cess, not taxes
T.M. Thomas Isaac, Finance Minister of Kerala

In a media interaction in Delhi recently, T.M. Thomas Isaac said that the Centre's stimulus measures so far has been piecemeal and cannot result in a major revival of demand and investment in the economy. Edited excerpts:

The Centre is exploring the possibility of reducing taxes on automobiles and biscuits to boost demand in those sectors. Will Kerala support this move?

We are opposing the proposal to reduce GST rates on automobiles for three reasons. First, automobile rates are not high because GST rates are high. The existing GST rate is much below the pre-GST taxation rate (if you take out the cess component). Second, if you still want to reduce the price for some reason, remove the cess. Now the Central government will ask how it should compensate for the revenue shortfall. You borrow, and then extend the compensation cess for another year or two years until you recoup the money you have borrowed. But, do not touch GST rates as its reduction impacts our (state government's) revenue and expenditure plans. States cannot borrow more as our borrowing powers are limited.

Are other states on board?

We are talking to other states. The fitment committee has already said this is not advisable. We are going to discuss this in the next Council meeting. Let us see if there is any other alternative. You cannot tamper rates in every meeting.

What if the Centre and majority of states go ahead with such a proposal?

All decisions of GST Council so far has been unanimous. We will not buckle under pressure, but will seek voting if our concerns are not addressed. What is India's tax GDP ratio? It is one of the lowest in the world. That is the root cause of the problem.

How do you see the government's stimulus measures?

Why is there a slowdown? Transactions are on hold. People are delaying and withholding purchases. It is this slump in demand, which is keeping the inflation low. So keeping inflation under control is not an indication of economic revival, but persisting slowdown. Inflation and growth go together. It is basic economics. Organising shopping festivals is fine; but can it address the mammoth problem that India is facing today? Why is this slowdown? From cars to biscuits, people do not have money to buy these items. In July, capital goods sector grew just 7 per cent, which means even industry investments are on the decline. So, if consumers are not buying and industry is not investing, who should be spending? If the government is not increasing its expenditure proportionately, growth will slow down. This is the problem that the finance minister must address.

What should the government do?

One week preceding Onam, the treasury outflow was about Rs 7,500 crore. We cleared all arrears and pending bills and paid festival allowances. This was our way of putting money into the hands of people in spite of the floods.  Similarly, there should be a fiscal stimulus. Everything else is peripheral. The government should do three things. Job guarantee under MNGREA should be increased to 150 days. Their wages should also be increased. If that happens, there will be money in the hands of people, and a resultant increase in spend. They may buy essential goods, but not cars. Second, if you wish to encourage spending in goods such as cars, provide credit at low rates. You can even announce interest subvention on certain items. Try this for six months, and you will see people scheduling  their purchase or investment plans. The third intervention should be in the area of infrastructure. Road Transport minister Nitin Gadkari has grand road construction plans. Instead of asking him to slowdown, sanction more money. This is what fiscal stimulus means. Reducing turnaround time of exports and improving ease of doing business are all good, but that is not sufficient.

What should be the role of state governments?

What is their attitude towards state governments? At a time when state governments should also be contributing for this fiscal stimulus, Kerala's approved borrowing limit has been curtailed by Rs 6,000 crore. Earlier we were allowed to borrow upto Rs 24,000 crore, now we have been asked to limit it to Rs 18,000 crore. The reason given is that our Public Account 2016-17 exceeded the limit. Should such decisions be taken during economic slowdown? Second, there is a post disaster monitoring report, which says Rs 31,000 crore is needed for reconstruction of post flood Kerala. We have decided to take loans from the World Bank. But the centre is saying that this should be included in the normal borrowing. You are squeezing the state when you should be taking an expansionist stance. They are instead talking about reducing GST rates on automobiles. If Rs 50,000 crore is coming as taxes on this account, Rs 25,000 crore is the state's share. The Centre should change this attitude.

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