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Can Modinomics Work Wonders Without Financial Emergency

MAY 02, 2020

By Naresh Minocha, Consulting Editor

HOW should Modi Government mobilize resources for the economy's revival after phased lifting of unprecedented lockdown of Indians?

This issue has assumed special significance due to three reasons: 1) India is exploring all options to take loans from multilateral financial institutions (MFIs) 2) Finance Ministry has purged Indian Revenue Service (IRS) Association's 44-page report titled Fiscal Options & Response to Covid-19 epidemic from official domain 3) Prospects of Centre ordering Financial Emergency to garner & control resources to manage lockdown-accelerated economic crisis are jaw-dropping.

Take the last first. Financial emergency (FE) has never been invoked in Independent India. It has political, fiscal, monetary and other economic implications that can only be speculated at present.

News reports show that finance ministers (FMs) of opposition parties-ruled States & other leaders voiced grave concern over imminent risk of imposition of FE.

They foresaw FE while addressing a webinar organised by the Gulati Institute of Finance and Taxation on 27th April. They focused on mounting GST compensation dues, state revenue drying up due to lockdown and mounting debt burden on States.

Punjab FM Manpreet Singh Badal estimated combined Centre-States fiscal deficit at 10% without extra funding to tackle Covid crisis.

One story quoted ex-FM of Jammu & Kashmir Dr Haseeb Drabu as saying that pandemic was being used by the Centre to create a new kind of "cannibalistic federalism".

He believed that FE would herald the end of fiscal federalism. "The moment you get into monetisation of state taxes and all, you are giving enough ground for financial emergency" Dr Drabu added.

The fear has been articulated well by Kerala Finance Minister Dr. TM Thomas Isaac in an interview with The Hindu BusinessLine. He stated: "Decision-making at the Centre continues to remain arbitrary without even a modicum of consultative processes that should precede them. And what, may I ask, is the Finance Ministry doing?"

Dr Isaac continued: "State Governments are on the brink of financial collapse but there is no help forthcoming, they're not even doing the basic minimum and that leads us to believe that they're finding alibis for imposition of a financial emergency. Fiscal federalism is already demolished and a financial emergency, we fear, will be its final death knell".

FE debate was triggered by a Public Interest Petition (PIL). It has urged the Supreme Court to issue "a writ in the nature of Mandamus thereby directing the Government to impose Financial Emergency". The hearing on Petition dated 26th March 2020 has not yet resumed after the Court ruled out recommending FE straightaway.

The petitioner contended that FE is needed "to safeguard the Rule of Law in India, which is being threatened by arbitrary actions of various authorities during COVID-19 epidemic". The petition perceived threat to "financial stability or credit of India" due to economic activities coming virtually to halt after imposition of lockdown.

The PIL sparked a slew of articles on various aspects of FE and whether Supreme Court can direct the President on this issue. The last time perhaps when FE hit headlines was in 1980. At that time, a noted economist Dr. P. R. Brahmananda mooted FE to manage inflation & related economic problems. The Centre then ruled invocation of Article 360.

FE is indeed a grey area as it has never been imposed and thus put to legal scrutiny. "There was broad concurrence that there is no need for reconsideration of the provisions relating to Financial Emergency in Article 360", according to report of task force on 'Constitutional Scheme of Centre State Relations'.

TF was constituted by Commission on Centre-State Relations (CCSR) that submitted its seven-volumes report in April 2010. It stated: "The provisions of Article 360, which deal with financial emergency are also not being dealt with as no significant constitutional challenges flowing from the same have been thus far highlighted".

The Government has not yet disclosed what action has been taken on its recommendations. CCSR, however, did not give recommendation on FE.

According to Article 360 of the Indian Constitution, "If the President is satisfied that a situation has arisen whereby the financial stability or credit of India or of any part of the territory thereof is threatened, he may by a Proclamation make a declaration to that effect". After invoking Article 360, the Centre can give directions to any State to observe "such canons of financial propriety as may be specified in the directions, and to the giving of such other directions as the President may deem necessary and adequate for the purpose ". The directives can include asking States to reduce salaries and allowances of all government employees.

At present, at least three State Governments have lately announced varying cuts in salaries of their respective employees. FE can empower the Centre to standardize reduction in wages across all governmental framework including the judiciary.

FE provision has its origin in Report of 'Expert Committee on Financial Provisions ' submitted to Constituent Assembly of India (CAI) on 5th December 1947.

According to the Report, "We would suggest that there should be a special provision in the Constitution authorising the President in an emergency to suspend or vary the financial provisions in such manner as he may think best in the circumstances. For example, if there is a war and an Excess Profits Tax is levied, it might be necessary for the Centre to retain the whole of this tax for itself".

Later, proposal to incorporate FE provision in Constitution was debated and approved in CAI. Dr. B. R. Ambedkar, Chief Architect of the Constitution, contended that incorporation of FE provision in the Constitution should be based on the United States' experience in overcoming great depression through a law.

The US President Franklin D. Roosevelt faced problems in carrying out FE through an enactment named National Industrial Recovery Act (NIRA), 1933. The Supreme Court declared the law as unconstitutional in 1935.

Dr Ambedkar thus told CAI on 16th October 1949: "we know that under the American Constitution within a very short time the legislation passed by the President was challenged in the Supreme Court and the Supreme Court declared the whole of that legislation to be unconstitutional, with the result that after that declaration of the Supreme Court, the President can hardly do anything which he wanted to do under the provisions of the National Recovery Act".

Invocation of FE might well help Prime Minister Narendra Modi to show the power of celebrated Modinomics. FE might, however, kill animal spirits and scare away foreign investors. It might stir up in investors' mind the risk of expropriation of their legitimate profits and investments created through toiling over the years.

Digressing from speculation to ground reality, Modi Government is going an extra mile to take loans from the World Bank, Asian Development Bank, New Development Bank and International Monetary Fund (IMF). The possibility of Government accepting bilateral aid as in the case of Bullet Train project can't be ruled out.

The loan from these sources might aggregate to billion. This is not adequate to put the economy to 8 percent annual growth in gross domestic product (GDP), if not more.

It remains to be seen whether the Government would tap the dividend route to the hilt. It can ask RBI, NABARD, EXIM and SBI to declare special dividends. It can access reserves of cash-rich companies through special dividends or through strategic sale of shares of one PSU to giants such as ONGC, NTPC and IOC.

As for additional tax and non-tax revenue, the Government should take back its decision to expunge IRS Association's 44-page report titled Fiscal Options & Response to Covid-19 epidemic. As elaborated in latest TIOL – COB (WEB) column titled COVID-19 - 'FORCE' - CBDT has not ONLY handled badly, it has handled Exceptionally badly!, good ideas in the report should be embraced.

In fact, there is a fit case to solicit more such reports through brain-storming meetings in different ministries as was done in case of Transforming India initiative in 2016. The Government should prepare a road-map for both austerity & expenditure efficiency and revenue mobilization. The road-map must focus on tapping human capital especially estranged army of migrant workers.

They hold the key to economic renaissance. The Government must announce credible measures to assuage their deep emotional wounds. It should build high-rise dormitory apartments in all cities to accommodate them as tenants. Let this be the first step towards Smart & Safe cities for all citizens.

Sub: Clueless government

This government is clueless about economy and fiscal measures required for re-railing of the economy. Financial emergency is an untested tool. None knows its intended and unintended effects. But, as the proverb goes "Fools rush in where angels fear to tread".

As regards the IRS brats who dared advise the government to raise taxes at a time like this, and bring back all the repealed archais laws, it is clear that the training given to the probationers in the training academy is not keeping pace with changing times. These IRS brats have learnt ropes and tricks from the seniors and tried to foist it on the government at a most inopportune moment. They deserve what they got. No promotions to the 50 for next fifteen years!

Posted by Gururaj B N