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 challenges 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 Rs. 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 Rs. 16,000 crore out of the Rs. 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.
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
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.
(The writer is author, economist & philanthropist. He can be contacted at www.sunilkummargupta.com)