. the election, but the down sliding the

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Tenure of Modi Government will be known for bold economic decisions. Among many
bold decisions, demonetization and implementation of Good and Services Tax
(GST) are supposed to be the boldest ones. Deciding is one thing, but dealing
with situations that are created after that is completely different. While
demonetization can be said to be backfired, because none of the stated
objectives as spelled by Prime Minister Modi on the day of announcement came to
be achieved, the implementation of GST is likely to succeed, though it is
passing through a painful process, in which traders and entrepreneurs are
facing a lot of hardships. Changing the indirect tax regime is really a very
tough process and the hardships being faced by entrepreneurs are on expected
lines.
But these two decisions of the government have created some new problems for
the government and the nation and they should be addressed on priority basis.
One problem relates to revenue crisis and another relate the poor health of our
banking system. With the implementation of GST, government was expecting better
tax revenue collection. In the first two months, the collection was more or
less satisfactory, but later on it started declining. One reason of decline in tax
collection was the downward revision of tax rates of some goods and services.
Government was forced to reduce the rates because of political compulsion. In
Gujarat election ruling BJP was facing tough challenge from Congress, which had
made GST as one of its election issues. Rahul Gandhi was dubbing GST as Gabbar
Singh Tax and it was feared by BJP leaders that the party may lose heavily in
urban areas. Hence the climb down was made in tax fixation. The policy to
downslide the tax rates of many items proved helpful and BJP scored big win in
urban areas of Gujarat. Out of 56 urban seats, it won 44 and finally emerged
victorious in election.
Though BJP had won the election, but the down sliding the tax rates resulted
into revenue loss on collection front. In the month of November the drop of tax
collection was Rs 10,000 crore and in December it was over Rs 12,000 crore. It
is anticipated that the tax collection in GST regime will be Rs 50,000 less
than what it would have been, had the initial tempo continued. Anyway,
anticipating the loss of revenue, the government had decided to borrow Rs
50,000 crore to meet its budget expenditure and to keep fiscal deficit within
appropriate limit.
Borrowing from the market by our government is not new thing. In the past our
government has resorted to this borrowing many times, but it is good if this
measure is adopted to finance the development project. To fund to non
development expenditure only increases the burden of the government, which must
be avoided.
Another problem faced by both the government and the nation pertains to bad
financial health of our banking system. Demonetization was being appreciated by
claiming that the money saved by people would come into our banks and by having
larger deposits banks would prosper. No doubt, bank deposits rose heavily after
demonetisation, but the demand for bank loans also declined, because business
sentiments had been hurt after the demonetisation. Banks have to pay interests
on the money deposited in their branches and hence there is cost of having
money. The cost is recovered and profits out of deposits are earned by
advancing loans. Our banks were found to be facing a situation of too much
deposit and too less borrowers. This situation only burdened our banks, which
were already facing the problems of Non Performing Assets accumulated to the
tune of over Rs 800,000 crore.
Now government is facing the challenge to revive the banking system and to
overcome this challenge it needs strong fiscal situation, which is possible
only through higher collection of tax. Finance Minister, Arun Jaitely will have
to do careful rope walking, while preparing its next budget. We can see the
response of the government to these two challenges, only after he presents his
Budget in next month.