Home > 2016 > Brexit, GST and Idea of Single Market

Mainstream, VOL LIV No 33 New Delhi August 6, 2016

Brexit, GST and Idea of Single Market

Wednesday 10 August 2016, by Arun Kumar

The idea of a single market in India will get politically discredited if it marginalises farmers, workers and the poor even if it is beneficial to the elite sections of society. GST is too complex and requires computerisation, making it tough for the small-scale sector to implement it.

Britain’s vote to exit the European Union (EU) dents the idea that a single market is good for society. Even if by a close margin, the UK has voted to delink from the European market. The UK was the least integrated in the EU since it did not join the currency union and also asserted its political independence more than other European nations did. It did derive economic benefits by being part of the EU via increased trade and easier financial flows. London’s status as a key financial centre in the world is substantially due to Britain’s membership of the EU. No wonder, London wanted to ‘Remain’ and Londoners are signing a petition for London to become a city state and remain in the EU. A majority in Scotland and Northern Ireland also wants to stay in the EU. Thus, only the majority in England and Wales wants to quit the single market.

The cost of leaving is now apparent. Even though the markets have recovered from the initial fall, there will be a rise in the rate of inflation, downgrade of credit rating, uncertainty in investment, possibility of a recession in the UK and consequent job losses. There is a possibility of other countries also exiting and whittling down the EU as a single market. This uncertainty will impact the EU and the world economy adversely. As the drama of Britain leaving the EU, the UK splitting up and the EU itself possibly getting eroded plays itself out, the economic consequences will become apparent.

The vote was more political than economic but it has important economic roots which raises a key issue for politicians, namely, why a single market is not so appealing to many people. Common markets have meant the dissolution of national boundaries for economic reasons. That enables greater trade and flow of capital and technology. There is NAFTA in North America and ASEAN in Asia. The WTO has also attempted to integrate nations into closer economic cooperation since 1995. Theory suggests that more integration leads to increased trade and to higher incomes for people.

In reality, what has happened is that greater opening up has been accompanied by rising disparity within countries. This was reflected in the 2011 slogan: ‘99 per cent against the 1 per cent’. According to Samuelson, markets are based on the ‘dollar vote’ and that marginalises the marginal. This is because purchasing power determines market outcomes and the poor have less of it and so get marginalised. With the ascendency of markets, policies have turned pro-business. The power of capital has increased due to international mobility and it has extracted concessions after concessions from governments. For instance, taxes on income and capital gains have declined the world over.

Simultaneously, government intervention in the economy has weakened so that the provision of public goods like education, health and civic amenities has declined, adversely impacting the poor. The welfare state has been slowly whittled down leading to an increase in disparities and further marginalisation. The World Bank recognised in the 1980s that the markets do not cater to the needs of the poor, so they suffer. It, therefore, suggested ‘safety nets’. But that is only a palliative and not a solution to the problem.

In the advanced nations, discontent remained below the surface due to a rise in middle class consumption based on the increase in paper wealth, boosted by speculative gains in real estate and financial markets (including the stock markets). This collapsed with the start of the global financial crisis in 2007. There was a massive increase in unemployment and wages of workers and the middle classes stagnated. The world economy has yet to recover from that crisis.

Added to this is the massive migration to the advanced countries due to growing conflicts in West Asia and Africa and poor living conditions in the developing world and East Europe. The workers and middle class in the advanced countries blame immigration for their plight and are opposing it. Mexicans are being blamed in the USA, West Asians, Africans and East Europeans in West Europe and so on. Terrorist attacks in many parts of Europe and the US have only added fuel to the fire. These are seen to be the consequences of opening up. While the rich, to protect their gain, have turned to the Right, so has labour facing a decline in its fortunes.

What lessons does this have for India? There is talk of creating a single market via implementation of GST so as to help businesses. It is said that the GDP will rise, employment will be generated and inflation will be checked.

Even if all this were to be true, there will be differentiation between the big business which operates pan-India and the rest. Small and medium businesses, not to talk of the cottage sector, operate locally, so a single market will not impact their efficiency. Further, since GST is very complex and requires detailed accounts and computerisation, the small-scale sector cannot implement it, and even if it does so, it would raise its costs substantially and make them less competitive. In other words, large-scale businesses would gain and displace the small-scale and cottage sectors.

As large-scale industry expands at the expense of the small-scale sector, it will lead to lower employment, especially for the semi- and un-skilled labour. Since 1990, in spite of massive investment in the private organised sector, its direct employment increased from 7.5 million then to 9.5 million now while the workforce has increased from 250 million to 450 million. It has almost led to a jobless growth.

There is massive under-employment in agriculture and displacement of labour with growing mechanisation. People are moving from rural to urban areas in search of work. They only get employment in the small and cottage sectors. But if GST leads to their decline, where would this labour go?

The recent revolt of youth in the well-off communities like the Jats and Patels reflects this. They want non-agriculture jobs and are demanding reservation even though that is not a solution to their problem. The 23 lakh applications for 328 jobs of peon in UP reflects the crisis of unemployment faced by youth. There is massive cheating in exams to get a passport to a job. The fake degree racket exposed in Vyapm and DMAT scams, the recent expose of students topping in board exams by paying money and the continuing scam of capitation fees in professional courses—all represent a huge crisis before youth.

GST can only aggravate this crisis. So if a single market leads to growing differentiation (anywhere), the result can only be increased social conflict. The idea of a single market in India will get politically discredited if it marginalises farmers, workers and the poor even if it is beneficial to the elite sections of society. This idea can only become politically acceptable, if it caters not just to the corporates and international finance but most crucially to the marginalised majority in society. 

The author is a retired Professor of Economics, Jawaharlal Nehru University, New Delhi.