Re-globalization with risk control should also mean a growth relook

In a country where the idea of rational expectations was hatched, Silicon Valley Bank in the US went with the held-to-maturity valuation of its holdings of Treasury securities (permissible by its state regulator), while the rational market watched, and acted upon, the market valuation of those assets at a time of rapidly rising interest rates.

The demise in Switzerland of Credit Suisse reflected longer-term regulatory neglect, whose impact got hastened when monetary policy started tightening. Although both US and Swiss central banks sprang into damage-control mode, these developments have signalled the need for every nation to pay more attention to the impact of monetary policy on its own regulated entities, and to ring-fence itself against public policy disruptions elsewhere.

Yes, globalization has enabled the spread of prosperity, but it carries increasing risk. The key now is to engage globally while watching the risk that goes with every move. The latest threat is the unilateral imposition of the Carbon Border Adjustment Mechanism (CBAM) by the EU, in a bid to prevent European industry from being undercut by cheaper goods not hobbled by carbon emission controls.

What every country needs is a fresh examination of its growth drivers—a search for productivity enhancement options through avenues left unexplored because of the erstwhile focus on growing a few sectors through trade. The need of the hour is to rebalance consumption towards the unmet needs of the poor while discouraging carbon-intensive consumption of the rich.

Growth in India had declined for eight straight quarters before the onset of the pandemic followed by the Ukraine war. Why was growth slowing? Many reasons, but one among them was that the goods and services tax (GST) was and continues to remain hostile to informal small-scale activity in India. A lot of commendable measures have aided small scale industry during the pandemic, but those cover GST-registered units already within the ambit of the formal sector. What got overlooked were roadside enterprises not registered under GST, either below the turnover threshold, or above the threshold but unwilling to register because of the procedural complications of the GST reporting system.

The paradox is that the Central GST Act as initially enacted allowed a formal and respectable way by which to enable transactions across the great divide between registered buyers and unregistered sellers. Clauses 9(3) and 9(4) of the Act allowed a Reverse Charge Mechanism (RCM), under which the buyer could pay the tax directly instead of paying the tax to the seller for onward transmission to the exchequer.

Clause 9(4) specifically enabled input purchases from unregistered sellers. But the rules which immediately followed the law did away with RCM, and instead exempted such purchases from taxation altogether. Paradoxically, this made registered sellers wary of engagement with unregistered sellers, since claiming exemption on an input purchase aroused suspicion, unlike straightforward payment of tax through RCM, which, like normal GST payments to the seller, fetched the buyer input tax credit. Later, clause 9(4) itself was amended to apply only to special classes of notified sellers selling taxable services, such as governments renting out premises for telecom towers, recently extended to judicial premises. But this is wholly different from the small supplier issue alluded to above.

With RCM not universally available, the axe fell on millions of small enterprises selling small manufactured inputs (such as nuts, bolts, nails, brake linings), or services such as cloth-dyers, within-town bike couriers, and three-wheelers ferrying supplies between city shops and workshops/storage on the urban periphery. These outcompete formal enterprises because of their low overheads. Perhaps for that reason, trade associations, which by definition are confined to formal enterprises, oppose the re-introduction of a universal RCM.

The Reverse Charge Mechanism does not lead to revenue loss as the tax is paid (and recoverable like other input taxes). If the RCM is feared as an inducement to falsification of turnover by those aiming to stay below the GST radar, a limit of, say, 10% can be imposed on total input credits claimed through RCM rather than through registered sellers. Successful small enterprises will in any case scale up and choose the input credit advantage that goes with registration.

In a difficult global environment, we need to exploit whatever domestic resources we have on hand. Enterprising youth entering the country’s labour market without the skills necessary for paid jobs, whose numbers are regrettably very large, need livelihood options whereby they can engage with the formal sector in a respectable way.

Indira Rajaraman is an economist