Why the Reserve Bank cut India’s 2018 growth rate
Two big bang reforms—demonetisation and goods and services tax — did not deliver what they had promised in 2017
With farm-produce prices falling after an increase in the 2017 monsoon — or kharif—crop, the muddled implementation of a new nationwide tax and the effects of the November 2016 withdrawal of 86 per cent of India’s currency by value, India’s real growth rate for 2017-18 is 6.7 per cent, down from 7.3 per cent in August 2017.
“The loss of momentum in Q1 of 2017-18 and the first advance estimates of kharif foodgrains production are early setbacks that impart a downside to the outlook,” said an October 2017 Reserve Bank of India (RBI) report. “The implementation of the GST (goods and services tax) so far also appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term.”
The monsoon harvest of 2017 was 135 million tonnes, up 23 per cent and the largest ever since 2010. When the RBI cut its growth forecast, the International Monetary Fund and World Bank followed, lowering growth projections to 6.7 per cent and 7per cent, respectively, citing the aftermath of demonetisation and the introduction of GST.
The impact of demonetisation— the withdrawal of 86 per cent of India’s currency, by value, in November 2016 — led to widespread job losses and depressed the economy, particularly in rural and semi-urban areas and mainly felt by small traders and farmers.
A crackdown on black money (or unaccounted income) was one of demonetisation’s objectives, which kept changing, as IndiaSpend reported in December 2016. There is no clear information on the black money it identified, according to official data. While GST unified India into a common market, implementation slowed down businesses and impacted traders.
Demonetisation: Success or failure?
Demonetisation had three objectives: To curb black money and corruption and suppress terror funding, Prime Minister Narendra Modi said in his address on November 8, 2016.
Of the ~15.44 lakh crore demonetised currency, about 99 per cent or ~15.28 lakh crore came back as on June 30, 2017, according to the RBI annual report 2016-17, as we reported on September 5, 2017.
This indicates that only 1 per cent of demonetised currency did not return to the central bank. While critics of demonetisation said the government failed to bring back black money, supporters said the move cannot be assessed on the single parameter of notes returned.
Note-ban hits farmers, traders
By November 2017, farmers had to wait for at least two weeks for cheques to be cleared, putting them under more debt.
This deepened the farming crisis, as most farmers could not repay loans. Only 9 per cent of loans were repaid in 2017 compared to 70 per cent in 2016, cash reserves are down and bad debts up, we reported on
November 11, 2017.
Small shopkeepers were still facing losses from demonetisation; GST has made goods expensive thus reducing their profits, IndiaSpend reported on November 10, 2017.
A year later (October 27, 2017), currency notes worth ~16.35 lakh crore (value) were in circulation, or about 91 per cent of ~17.97 lakh crore in circulation on November 4, 2016 before demonetisation.
Fight against black money
The income tax department seized assets worth ~900 crore and undisclosed income of ~7,961 crore through searches conducted on around 900 groups between November 2016 and March 2017, according to this reply to the Rajya Sabha on December 19, 2017. As many as 8,239 surveys — which do not involve seizure or confiscation of cash/jewellery or assets as is done in “searches”— were conducted over the same period, detecting undisclosed income of ~6,745 crore.
As many as 1,152 groups were searched by the income tax department in 2016-17, in which assets worth ~1,400 crore were seized, up 96 per cent from ~713 crore in 2015-16. Undisclosed income admitted in these searches was up 42 per cent to ~15,660 crore in 2016-17, from ~11,066 crore in 2015-16.
Between April and October 2017, about 275 groups were searched by the tax department, assets worth ~573 crore were seized and assessees revealed ~7,800 crore in unaccounted income. Undisclosed income of ~2,485 crore was identified through 3,188 surveys. “There is no official assessment of the total value of black money as on date,” Shiv Pratap Shukla, minister of state for finance, told the Lok Sabha in this reply on December 22, 2017.
Post demonetisation, 37 cases were registered under Prevention of Money Laundering Act, 2002, leading to the attachment of properties worth ~144 crore, according to this reply to the Rajya Sabha on December 19, 2017. In one of the cases, still under investigation, funds worth ~100 crore was remitted outside India.
As many as 413 benami transactions have been identified till June 20, 2017, since November 1, 2016, when the amended Benami Transactions (Prohibition) Amended Act, 2016 came into effect, FactChecker reported on September 19, 2017.
The registrations of 224,733 shell companies have been cancelled as on November 30, 2017.
To track black money stashed abroad, India signed an agreement with Switzerland that will allow automatic sharing of tax data from January 1, 2018.
GST unites India but impacts businesses
GST was launched on June 30, 2017, as a unified taxation system that would end multiple taxation across the states, and create a level playing field for businesses throughout the country.
About 9.9 million taxpayers have registered under GST till December 25, 2017, of which 1.6 million are composition dealers required to file returns every quarter, according to the central board of excise and customs.
About 5.3 million returns have been filed for November till December 25, 2017, with collection of ~80,808 crore, according to this release from the finance ministry on December 26, 2017.
Maharashtra, home to India’s financial capital Mumbai, reported the most (14 per cent)—~53,240 crore — GST collection.
GST impacted textile traders, especially in Surat, that reduced the daily production from four crore metre of grey cloth to three crore metre.
“GST has a much better ability to track and prevent black money as compared to demonetisation,” Gita Gopinath, professor of international studies at Harvard University, told Mint in an interview on December 22, 2017.
“Maybe if they had not done demonetisation, the government would have had more time at hand to iron out all the problems with GST implementation,” she added.