The uncontrolled spread of the coronavirus pandemic across the country has put India’s economy, society and politics under unprecedented strain.
A glimpse of the scale of the economic destruction caused was revealed at the 41st meeting of the GST (Goods and Services Tax) Council, where the deficit in compensation payment for this year was estimated at around Rs 2.35 lakh crore. This would lead to a huge reduction in income for States at the time when they needed it most, as they were engaged in the front line of the battle against the pandemic.
However, it was the position of the Center on this whole issue that has given rise to a great deal of controversy.
Qualify the pandemic as an “act of force majeure”, The Union Finance Minister, Nirmala Sitharaman, revealed that the Center could not make up the deficit. Instead, he outlined proposals that would involve states taking loans to raise resources. While states accuse the Center of failing to give them their due, the Center, citing legal advice from the Attorney General, has asserted that it has no obligation, due to extenuating circumstances, to pay the deficit in a time of sustained crisis.
Union Finance Minister Nirmala Sitharaman is chairing the 41st GST council meeting via video conference in New Delhi. August 27, 2020. Photo: PTI
The position of the Center in this regard is extremely worrying in several respects. On the one hand, the entire burden falls on states at a time when they can barely afford it. More importantly, the language used by the Center, claiming an ‘act of God’, reveals a harrowing tendency for the Center to step back at the same time when it is most needed. The ‘Act of God’ is a clause used in private contracts to indemnify one or both parties from compliance with the terms of the contract due to events beyond their control.
It is worrying that the Center sees itself as a private actor in a market economy, when what is urgently needed is to transcend this role. By adopting the logic of a private contract, the Center is jeopardizing the social contract on which our democratic system rests.
Changing the load
As a result of the implementation of the GST, some states would see a shortfall in collections. They are owed a severance pay to fill this shortfall. The amount of compensation has been estimated at Rs 3 lakh crore in this current financial year, of which only Rs 65,000 crore has been raised, leaving a deficit due to the states of Rs 2.35 lakh crore.
The Center has outlined two proposals for states to make up the deficit, which involves additional borrowing from states. The Center says it could borrow a sum of Rs 97,000 crore from the RBI (which they estimate is the shortfall due solely to the implementation of the GST), or borrow the total sum of Rs 2.35 lakh crore. The Center says it would create, together with the Reserve Bank of India (the RBI), a “special window” for states to borrow the sum of Rs 97 billion, which could lead to lower interest rates. It is unclear whether this window would be available for Rs 2.35 million lakh, which could involve some market borrowing.
These methods would mean that the Center would not need to disburse funds to States. States are legitimately aggrieved, since in practice they are asked to solve the resource deficit themselves. They may have to imply higher taxes on certain assets in the future, as states struggle to raise funds to repay these loans.
Either method, however, involves additional borrowing from the states, that would raise the debt burden at a time when resources are extremely scarce. While this would free up resources and fiscal space for the Center’s legs, given that they would no longer have to pay these funds to the states, states face a difficult choice between the present and the future. Either they borrow more for greater resources today while bearing the burden of debt in the future, or they limit loans today in exchange for future flexibility. Both options severely limit your ability to fight a pandemic that shows no signs of slowing down.
Out of control?
Acts of God, or Force Majeure clauses, are used in contract law to protect the parties to a contract from circumstances that may arise beyond the control of either party. For example, insurance companies would not pay for vehicle insurance if the car is lost in an earthquake; if they had to do it for every car lost in the natural disaster, they would go bankrupt.
Although private entities in a situation of deep economic distress can claim Force Majeure to protect itself against risks, a country’s government should not. In a situation of economic uncertainty, private agents would not want to invest, as they can foresee huge losses in the future.
If all agents did it at the same time, the economy would contract and livelihoods would be lost. What is required is that an agent external to the market intervenes and makes the expenditure, so that economic activity is supported. The only agent that has the financial capacity to do so is the Central Government. You must tax, borrow or “print” money, in conjunction with the RBI, to raise the necessary resources.
When claiming Force Majeure, the Center implicitly states that the events are beyond its control. In reality, the Center can do much more to stop the economic decline. The Center is choosing to limit its interventions, transferring the risk to those who cannot assume it. State governments, and ultimately ordinary citizens, are the ones who will face the final burden of a slowing economy and a rampant pandemic.
Social and private contracts
How exactly does the Center see its relationship with citizens? A prominent theme in the early 18’sth The philosophy of the century was the notion of social contract. He characterized society as operating as if a contract was signed by all citizens, where a sovereign government was obeyed by all, conditional on the fact that certain rights and freedoms were protected. This conception arose from the recognition that there are immense benefits to be gained from living in an organized society.
There are, of course, many different ways to conceptualize the social contract, and many different ways in which it has been – rightfully – criticized. But it captures an essential truth of our societies. Any democratic society cedes immense powers to the government, namely the power to impose taxes and control of the legal order. In return, we ask that the government preserve our rights and freedoms and protect us from forces beyond our control, such as a global pandemic or a massive threat to lives and livelihoods.
The current justification used for not paying GST fees shows that the central government is using the language of the private contract instead of the social contract. A private contract is limited to the interactions between both parties who sign the contract and allows one of the parties to withdraw in the event of events beyond the control of either. Furthermore, a private contract assumes that the costs of breaching the contract can be borne by the two parties alone. But the logic of a private contract is not applicable in the current situation, because the breach of the “contract” between the Center and the states imposes a huge burden on those who are not party to the initial contract. Citizens will have to bear the burden when states cut development spending. The Center is failing to meet its social responsibility to bear the risks and burdens that individuals simply cannot.
By maintaining the logic of the private contract, the social contract runs the risk of irrevocable damage. The only entity that can adequately combat the effects of the pandemic is withdrawing at the time when it is most needed, neglecting the responsibilities and duties entrusted to it. Human progress and development in modern societies have been based on the growing recognition that an individual should never be subject to the vagaries of nature and the market. In an age of existential global threat, we cannot allow random acts to weaken the essential ties that hold federal and democratic societies together.
Rahul Menon is Assistant Professor, School of Livelihoods and Development, Tata Institute of Social Sciences, Hyderabad.
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