Dwindling effect of Covid-19 on India’s Economy.

On March 11 2020, the World Health Organization declared Covid-19 a Pandemic, and it marked a major shift in our lives and India’s plans for FY 2020-21. India along with most of the world has been forced under a Lockdown. International Monetary Fund (IMF) predicts that Global Economy shall reduce by 3 %. Furthermore, India’s GDP growth was estimated to be a struggling 0-1% by the IMF.

The Trickel-Down effect of Covid-19.

An Economics think-tank estimates that for each month a country is under lockdown, it looses 1.5-2% of its GDP. To add fuel to the fire, India’s GDP growth was already lower than expected. Major cash cow sectors like Infrastructure and Automotive were gasping for air since November 2019. A report published by Deloitte estimated that these sectors could face a negative growth rate in double figures.

Since the lion’s share of commerce activities is halted, the monthly GST Revenue Collection has taken a Mike Tyson uppercut. India’s GST Collection was around the ballpark figure of INR 1,00,000 Crore per month in Jan and Feb 2020. But since March it has seen a dip in the numbers. The GST Revenue Collection for the month of April is said to be 40% less than usual.

As India’s fuel demand came to a complete stop, so did the Revenue for State Governments from the sale of fuel. Adding to the woes, what could have been an opportunity for State Governments to earn extra revenue through cess and due to the drop in crude oil prices was also shut by Covid-19. Apart from that sale of sin goods such as Cigarettes and Alcohol was also banned until recently. All these basically translates into State Governments steadily going bankrupt.

What are the tools at Government’s disposal to bring India Inc on track?

We are already witnessing the Government hiking taxes on Liquor and Fuel by historic margins. According to RBI the state excise duty on alcohol accounts for 10-15 percent of tax revenue for most states and State Governments collects more than INR 40,000 crore per year from the sale of tobacco products. In similar lines, Petrol and Diesel prices are also most likely going to be hiked in the coming months. But merely increasing excise on sin goods and fuel isn’t going to work. It isn’t Alladin’s famous phrase that opened the magic cave. We need something else…

Apart from the reliefs given by the Government in terms of extending the date for Revised ITR for FY 2018-19 and making Tax-Saving Investments, major relaxations are also given on the TDS front. It was announced that the late deposit fee for TDS i.e 12% is reduced to 9%. This relaxation should provide the Government with much-needed Revenue and also ease the burden on taxpayers.

Renowned Economist and ex-RBI Governor, Dr Raghuram Rajan believes that ‘Monetization’ in the form of a big Economic Stimulus can act as a Ventilator for India. But, anyone with decent medical knowledge will tell you that a ventilator is merely a short term solution. For people to be really healthy, they should be able to breathe through their own lungs. Ergo, we must look at other ways in which Economic Growth can be stimulated. But to keep India buoyant Economists estimate that a stimulus Package of INR 15 Lakh Crore should suffice.

One far fetched speculation is the legalization of Gambling. Fun Fact- A report from Doha-based non-profit International Centre for Sport Security estimated India’s illegal gambling market is worth nearly INR 10 lakh Crore. Imagine the Tax Revenue that could be generated from a legalized yet monitored gambling industry. Undoubtedly Tax Revenues from legalized gambling could be a major economic boost for the Economy.

Heard the phrase…’ Every Cloud has a silver lining‘? Well that could be the case here as more and more countries are considering an inward-looking economic policy. That’s what Union Minister Nitin Gadkari meant while he announced an ‘Import Substitution’ policy being formulated. He announced it during the conference for representatives of the Association of Lady Entrepreneurs of India. Meaning that India could become increasingly self-reliant than before, hence boosting employment and consumption.

To wrap it up, it’s still unclear what the Government’s course of action might be. Hence, it is important for us to keep our spirits high. In words of Ratan Tata- “In past, difficult times like these became the flagpoles of innovation and creativity that could not have been believed to exist“