The Sinha effect

Criticism from within the BJP seems to have played a key role in expediting government action on economic policy concerns

The last four weeks have seen the Union government improve its responsiveness to needs of economic management. A quick recount of some of the steps taken in this period to address economic policy concerns will help explain the point.

Broadly, there were three kinds of steps that the Union finance ministry took in this period — one set pertained to tackling the rise in oil prices, a second set was to remove the glitches in the goods and services tax (GST) launched some months back and the third set was aimed at addressing the stressed assets problem of state-owned banks and giving a boost to infrastructure investment. 

The problem of oil prices surfaced in the middle of September, when retail prices of petrol and diesel rose to levels that prevailed in May 2014, even though international crude oil prices had declined by half from what they were about three years ago. The government came under pressure to reduce excise duty on petrol and diesel. The government had rightly raised the excise duty when crude oil prices were falling so that it could mobilise revenues. However, reducing excise duty after crude oil prices went up became a difficult call as any such move would have affected the government’s revenues and widened its fiscal deficit. 

It was only on October 3, a fortnight after the demand was first made, that the government responded to the situation by reducing the excise duty on petrol and diesel by Rs 2 per litre with immediate effect. This meant a revenue hit of Rs 13,000 crore in the remaining months of the current financial year. It was a difficult decision, but it showed that the government was responsive to the need of the hour. 

Indications of changes in the GST rules were available from the first week of October. On October 1, Finance Minister Arun Jaitley said that once the government’s revenue flows turned neutral as a result of the GST, there would be scope for improving the tax structure including a reduction in the number of tax slabs. 

Less than a week later, the GST Council met under Jaitley on October 6 and decided on a host of measures aimed at addressing the GST-related concerns of businesses and trade. A major relief package was announced for exporters that among other things permitted merchant exporters to pay a much lower GST duty of 0.1 per cent on all materials procured for exports. It was also decided to refund duties collected from exporters within a time-bound schedule. 

Separately, the annual turnover threshold for units under the composition scheme that eased compliance considerably was raised from Rs 75 lakh to Rs 1 crore. Units with an annual turnover of up to Rs 1.5 crore were allowed to file quarterly returns. In addition, GST rates for 27 items were reduced and several relief measures announced for a large number of services including leasing of vehicles or hiring of taxis. The controversial provision of introducing e-way bills was postponed till next year. Even Revenue Secretary Hasmukh Adhia said the GST required some rejigs. 

And then on October 24 came the big announcement of a Rs 2.11-lakh crore recapitalisation package for state-owned banks, including Rs 1.35 lakh crore of recapitalisation bonds, Rs 58,000 crore of equity raising by these banks from the market and Rs 18,000 crore of equity infusion by the central exchequer. The move was aimed at addressing the capital needs of public sector banks, which were constrained by rising non-performing assets. On the same day, the government also announced a big plan for building roads connecting major towns at a total cost of over Rs 7 lakh crore. 

Note that none of these steps could be described as brand new plans. Oil price reforms, the GST issues and resolving the stressed assets problem of state-owned banks were already being tackled by the government through its initiatives. Yet, these responses and policy fixes were clearly overdue. 

That is perhaps why all these responses are likely to be interpreted as an outcome of what senior Bharatiya Janata Party (BJP) leader Yashwant Sinha wrote in his now famous article in The Indian Express. That article, published on September 27, argued how the government had not done enough to address problems in the areas of petroleum prices, GST implementation and financial stress of the banking sector. 

In less than four weeks of the publication of Sinha’s article, the government has announced an array of measures in all the areas highlighted by the member of the BJP Margdarshak Mandal. It is possible to argue that the government would have come out with these policy correctives on its own as well. But it seems criticism from within has certainly played a role in expediting government action.