The past week has been dominated by Finance Minister Nirmala Sitharaman’s remark alluding to an “act of God”. She was referring to the Covid-19 pandemic which is now seen as the main cause of the unprecedented recession in India and the world. Never mind that the slowing of GDP growth, or investment ratio or the stagnation of exports, or the rise in the bad loan ratio in banking, preceded the pandemic. Naturally the fiscal stress was rising, and the pressure of the inadequacy of tax collection was tangible even before the full fury of the pandemic.
The FM referred to “an act of God” as a Force Majeure clause in a commercial contract. The “contract” in this case is actually an Act of Parliament of 2017 which guarantees compensation to the states from the Centre, in case of a shortfall in tax collection from the Goods and Services Tax. The compensation clause says that any revenue growth falling below 14 per cent annual growth from year to year will be compensated from the Central treasury fund for a period of five years – i.e., till 2022. Meeting this legal obligation was becoming difficult, thanks to the slowing GDP
growth even prior to the pandemic.