Trump Tariffs and GST Rate Adjustments
Prabhat Patnaik
TRUMP’s tariff aggression against India will indubitably have a contractionary effect on the Indian economy. Even if Trump reduces tariffs from the 50 per cent he is currently levying, this will only be in exchange for India reducing its tariffs on American goods, especially agricultural goods and dairy products, which would mean larger imports from America and the hence reduced incomes in India. What is needed to offset this contractionary effect of the Trump tariffs is to inject additional purchasing power into the Indian economy, which can take three possible forms: one, an increase in the fiscal deficit; two, financing government expenditure through larger taxes on the rich (which converts some of their saving, or non-spending, into government spending); or, three, an increase in credit-financed private consumption expenditure (or equivalently, a reduction in private savings ratio).
The adjustment in the Goods and Services Tax rates that has just been announced to take effect from September 22, does not as such inject any purchasing power into the economy. Such an adjustment which leaves only two rates, 5 and 18 per cent (apart from a few “sin goods” that would now attract a penal rate of 40 per cent), in the place of the previous four rates, 5, 12, 18, and 28 per cent, certainly entails a lower overall burden on consumers if these concessions are “passed on”; but if the government’s revenue loss leads to a corresponding expenditure curtailment and not to an increase in the size of the fiscal deficit, then there is no net injection of purchasing power into the economy through this move: the increase in private consumption owing to the tax concessions is matched by a reduction in government expenditure, which does not add to the level of aggregate demand. Hence the reduction in aggregate demand imposed on the economy by Donald Trump is not offset in this case by the GST concessions.
What is more, it cannot even be claimed in this case that the total consumption of the working people would have increased owing to the downward adjustment in GST rates, as the government is claiming. If the share of wage incomes in sectors where consumption will increase owing to such tax concessions is about the same as the share of wage incomes in sectors where government expenditure will be curtailed because of the revenue loss, then the total consumption of workers (or more generally the working people) will remain unchanged owing to the fiscal measures of the government; and this is by no means an implausible assumption since government expenditure cuts will be primarily in infrastructure which has a large construction component and construction is highly employment-intensive, with a correspondingly high share of wage incomes in total output.
What this means is that the reduction in the incomes of the working people enforced by Donald Trump will not be offset by any increase in their incomes owing to the government’s fiscal measures; the latter will leave their incomes unchanged at the lower level to which Trump’s tariffs would have driven them. The Modi government in short has done nothing to offset the contractionary effects on the Indian economy, and to negate the income compression on the working people, that Trump’s tariffs are bringing about; while it may appear that giving GST concessions amounts to raising the consumption of the working people, unless the fiscal deficit is increased (or alternatively, the revenue loss through such GST concessions is offset by garnering larger direct taxes from the rich), the working people’s total consumption actually remains unchanged by the government’s fiscal measures.
While the contractionary effects of Trump’s tariffs on the Indian economy will not be offset in the least through the Modi government’s fiscal measures, what about a rise in credit-financed, or a reduced-savings-ratio-financed increase in private consumption expenditure? Newspapers have been full of reports about the estimated revenue loss of the government through the adjustment in GST rates. The central government itself has put the revenue loss in a full year at Rs 48,000 crores, on the assumption that the revenue loss of Rs 93,000 crores owing to the downward adjustment in rates will be offset by a Rs 45,000 crore gain from the increase in the rate on “sin goods”. The State Bank of India on the other hand has put the loss in a full year at only Rs 3,700 crores, on the grounds that the fall in prices owing to the tax cuts will stimulate consumption by so much that the overall revenue will fall only marginally despite the tax cuts. Various private estimates, including by credit-rating agencies, put the revenue loss much higher, at anywhere between Rs 1.2 to 1.5 lakh crores. But the underlying theoretical assumptions behind these estimates are never spelt out as they should be.
To say that consumption expenditure will be so boosted by the tax cuts that the revenue loss will only be marginal (since the lower tax rates will be getting applied to a higher total), begs the question: where will the purchasing power for this higher consumption come from? If tax concessions, on the base-level consumption, amount say to Rs 100, then a rise in consumption by Rs 100 over the base-level is clearly understandable; but in such a case the revenue loss is Rs100, not a paisa less. But if the claim is made that the rise in consumption expenditure over the base-level will be Rs 200 because of the tax concession of Rs 100, so that the actual revenue loss will be less than the tax concession on base-level consumption, then the question arises: where will the additional purchasing power of Rs 100 come from? It may be argued that the tax concessions will so enthuse the consumers that they would take credit to boost consumption, or run down their savings. Even if this is conceded for a moment, the fact remains that the working people will neither be considered credit-worthy nor have much savings to draw down for taking advantage of the cheapening of consumer goods. The so-called boost to consumption in other words cannot be expected to come from the working people.
The middle class consumers, including the salariat, could perhaps buy more through credit (or by running down savings) when they suddenly find goods becoming a little cheaper because of the tax-cuts, but even in such a case the boost will only be temporary; when the time comes to pay back the credit (or when the equal monthly instalments which they had promised to pay become due) they will have to cut back on their consumption. A credit-financed increase in consumption in other words not only gives a temporary boost, but actually reverses itself through a process that economist Joseph Schumpeter had called “auto-deflation”. The injection of purchasing power into the economy through this route, which is the third of the routes mentioned above, is both transitory and even self-reversing.
It follows therefore that the Modi government has not done anything to counter the contractionary effects on the Indian economy of Donald Trump’s tariff aggression. Even the obvious measure of providing financial subsidies to the affected small producers and paying for it through an enhanced taxation of the rich (including possibly a wealth tax) has not been adopted by it. The GST concessions announced by it will not, on their own, raise consumption, and thereby provide a stimulus to the economy to counteract Trump’ measures, since they do not amount to an injection of purchasing power.
There is however one route that the Modi government is likely to take, perhaps not consciously as an anti-contractionary measure, which will meet the approval of all segments of the ruling classes; and that is to increase the fiscal deficit by means that are not recognised as such, namely, the sale of equity of public sector banks. The privatisation of public enterprises has exactly the same macroeconomic consequence in any period as a larger fiscal deficit: it puts government equity in private hands while a fiscal deficit puts government bonds in private hands, with pretty much identical effects. But, for entirely spurious and dishonest reasons, the IMF and other agencies of global finance capital do not recognise this simple and obvious phenomenon, and frown upon a fiscal deficit while approving privatisation which they want. The Modi government will please globalised finance capital as well as domestic big business by privatising public sector assets; and expenditure financed through the proceeds of such privatisation, because these proceeds are no different from deficit financing, will have some unwitting anti-contractionary effect on the economy. But such privatisation will only further accelerate centralisation of capital and the burgeoning wealth inequality.
