Gov­er­nance: Econ­omy set to bounce back

The cur­rent dip in the GDP is tem­po­rary. It’s just teething trou­ble fol­low­ing de­moni­ti­sa­tion and GST im­ple­men­ta­tion, two steps that will pro­pel the eco­nomic growth in the long run

Gfiles - - CONTENTS - by SU­NIL KU­MAR GUPTA (The writer is au­thor, econ­o­mist & phi­lan­thropist. He can be con­tacted at www.sunilkum­mar­gupta.com)

The cur­rent dip in the GDP is tem­po­rary. It’s just teething trou­ble fol­low­ing de­moni­ti­sa­tion and GST im­ple­men­ta­tion, two steps that will pro­pel the eco­nomic growth in the long run

THE de­bate on In­dian econ­omy has be­come fever­ish with top politi­cians shar­ing their di­verse views. The Modi gov­ern­ment is fac­ing al­le­ga­tions of mis­han­dling In­dian econ­omy, not only from the op­po­si­tion but from their own se­nior lead­ers as well. Former Fi­nance Min­is­ter and se­nior BJP leader Yash­want Sinha, in an ag­gres­sively head­lined col­umn in The In­dian Ex­press on Septem­ber 27, wrote: “Pri­vate in­vest­ment has shrunk as never be­fore in two decades, in­dus­trial pro­duc­tion has all but col­lapsed, agri­cul­ture is in dis­tress, con­struc­tion in­dus­try, a big em­ployer of the work­force, is in the dol­drums, the rest of the ser­vice sec­tor is also in the slow lane, ex­ports have dwin­dled, sec­tor af­ter sec­tor of the econ­omy is in dis­tress, de­mon­eti­sa­tion has proved to be an un­mit­i­gated eco­nomic dis­as­ter, a badly con­ceived and poorly im­ple­mented GST has played havoc with busi­nesses and sunk many of them and count­less mil­lions have lost their jobs with hardly any new op­por­tu­ni­ties com­ing the way of the new en­trants to the labour mar­ket” How­ever, all of these al­le­ga­tions were coun­tered by his son, Jayant Sinha: “Sev­eral ar­ti­cles have been writ­ten re­cently on the chal- lenges fac­ing the In­dian econ­omy. Un­for­tu­nately, these ar­ti­cles draw sweep­ing con­clu­sions from a nar­row set of facts, and quite sim­ply miss the fun­da­men­tal struc­tural re­forms that are trans­form­ing the econ­omy. More­over, one or two quar­ters of GDP growth and other macro data are quite in­ad­e­quate to eval­u­ate the long-term im­pact of the struc­tural re­forms un­der­way.” Apart from this, now the ques­tion arises whether the note ban and a flawed GST im­ple­men­ta­tion has re­ally af­fected small busi­nesses ad­versely and, con­se­quently, led to dras­tic un­em­ploy­ment? There is a lot of hue and cry over the

slid­ing eco­nomic growth of the coun­try due to de­mon­eti­sa­tion and GST. In­dia Rat­ings and Re­search (Ind-Ra), an arm of global rat­ing agency Fitch Inc, has cut In­dia’s gross do­mes­tic prod­uct (GDP) growth fore­cast to 6.7 per cent from the ear­lier ex­pected 7.4 per cent in the cur­rent fis­cal, cit­ing the dis­rup­tive im­pact of de­mon­eti­sa­tion and the GST. This will be slower than the 7.1 per cent growth re­ported in fis­cal 2017. De­mon­eti­sa­tion was im­ple­mented with high ex­pec­ta­tions of erad­i­cat­ing black money from the mar­ket and re­triev­ing that money for the bank­ing sys­tem. It had been ar­gued that up to ` 3 lakh crore of il­licit, tax-evaded money would not come back into the bank­ing sys­tem. But that was not to be, with the Re­serve Bank of In­dia (RBI) re­port­ing that only ` 16,000 crore out of the ` 15.44 lakh crore of dis­con­tin­ued cur­rency was not de­posited in banks. De­mon­eti­sa­tion di­rectly hit the cash-based busi­ness model, es­pe­cially the un­or­gan­ised sec­tor and small and medium en­ter­prises where busi­ness trans­ac­tions are heav­ily cash de­pen­dent. De­mon­eti­sa­tion has forced the cash-based busi­nesses to be­come more tax com­pli­ant, which has lead to in­crease in costs and low prof­its for them. There­fore, it would not be fair to say that de­mon­eti­sa­tion has not curbed the flow of black money. How­ever, such a step was meant to slow down the eco­nomic growth for a while. De­mon­eti­sa­tion needs to be looked as a tinc­ture or medic­i­nal po­tion that tastes bit­ter ini­tially but cures the dis­ease and would make In­dian econ­omy healthy in the long run. GST, de­mon­eti­sa­tion and cash­less pay­ments are game-chang­ing steps to for­malise In­dia’s econ­omy. GST is the sec­ond at­tack on cash-based busi­nesses. GST has been im­ple­mented to bring about uni­for­mity in the In­di­rect Tax struc­ture of the coun­try, mak­ing the whole process—right from reg­is­tra­tion to tax pay­ments— cen­tralised and trans­par­ent. The pre­vi­ous in­di­rect tax struc­ture, based on multi-point tax­a­tion, was full of leak­ages and used more for tax eva­sion than tax fil­ing. Some of the eco­nomic pun­dits say that the In­dian econ­omy, which is still de­vel­op­ing, was not ready to ab­sorb and over­come two big eco­nomic steps taken back-to-back, ques­tion­ing the thought and plan­ning of the Fi­nance Min­istry. In­dia’s GDP growth has been in a free fall since the first quar­ter of the last fis­cal year. The gov­ern­ment data shows that growth has slumped from 7.9 per cent in the first quar­ter last year to 7.5 per cent in the sec­ond quar­ter to 7 per cent in the third quar­ter and fur­ther to 6.1 per cent in the fourth quar­ter be­fore fall­ing to a three-year low of 5.7 per cent in the first quar­ter of the cur­rent fis­cal year. The com­bined ef­fect of de­mon­eti­sa­tion and GST has ev­i­dently been more dis­rup­tive for the econ­omy than was ex­pected ear­lier. The GST im­ple­men­ta­tion though can­not be blamed on ac­count of its en­su­ing ben­e­fit to the econ­omy. GST is fac­ing teething trou­bles now but it will def­i­nitely boost the econ­omy in long run.

NOW, the ques­tion arises how long will the econ­omy take to re­cover from the dis­rup­tion of de­mon­eti­sa­tion? How long will the econ­omy take to come out from the teething prob­lems of GST im­ple­men­ta­tion? To get the an­swer to our first ques­tion, we need to check the Eco­nomic Sur­vey-II of 2016-17, which shows a dip in MGNREGA de­mand for job work­ers due to cash crunch el­e­vated dur­ing de­mon­eti­sa­tion. But MGNREGA re­turned back to nor­mal in around three months. This im­plies that econ­omy is get­ting back on the growth path. Ac­cord­ing to the World Bank’s coun­try head, GST is a “tec­tonic shift” that may pro­pel In­dia into “8 per cent plus growth rate”. Eco­nomic growth will def­i­nitely bounce back in full pace. All the small man­u­fac­tur­ing units will show a big bounce back dur­ing this fes­tive sea­son. We can say that In­dian econ­omy has taken some se­ri­ous and daunt­ing steps only to get ready for a stronger, longer and a sus­tain­able heap.

De­mon­eti­sa­tion has forced the cash-based busi­nesses to be­come more tax com­pli­ant, which has lead to in­crease in costs and low prof­its for them. There­fore, it would not be fair to say that de­mon­eti­sa­tion has not curbed the flow of black money

Fi­nance Min­is­ter Arun Jait­ley

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