Growth Drive Will Lead to Gradual Pickup in Recovery
Lower interest rates will result in improved balance sheets EXPERT TAKE
ditional stimulus of 15 bps to GDP.
Also, implementation of pay commission-recommended wage hikes for state government staff and increased affordable housing owing to flat prices over the past 3-4 years and lower interest rates (down 150 bps over the past two years) will buttress the government’s stimulus measures and set the economy on its path of recovery.
Taxation reforms and the government’s scrutiny of bank accounts that showed a steep rise in deposits post demonetisation will lead to improved tax compliance and taxto-GDP ratio in the medium term.
The government has reduced corporate tax rate for companies below ₹ 50 crore of revenues and individual tax rates for income below ₹ 5 lakh and removed several exemptions from April 2017 in its quest to widen the direct tax base. It will implement GST by July 2017 to simplify the indirect tax system. We expect a meaningful change in the behaviour of taxpayers given the ‘carrot’ of lower tax rates and the ‘stick’ of demonetisation.
The government has reiterated its medium-term goal of fiscal consolidation, though it pushed it back, for now, to focus on growth. It targets to reach a gross fiscal deficit/GDP ratio of 3% by FY2019 (estimated at 3.2% for FY2018) against the original target of FY2018.