Notes Ban, GST Held Back India's Economic Growth: Raghuram Rajan

Notes Ban, GST Held Back India's Economic Growth: Raghuram Rajan

Addressing an audience at the University of California in Berkley on Friday, Mr Rajan said for four years -- 2012 to 2016 -- India was growing at a faster pace before it was hit by two major headwinds.

STORY HIGHLIGHTS

1. Mr Rajan said current growth is not enough to meet the country's needs
2. He said in 2017 even as the world picked up, India's growth went down
3. On NPA, he said that best thing to do in such a situation is to clean up

Washington: 

Demonetisation and the Goods and Services Tax (GST) are the two major headwinds that held back India's economic growth last year, former RBI Governor Raghuram Rajan has said, asserting that the current seven per cent growth rate is not enough to meet the country's needs.

Addressing an audience at the University of California in Berkley on Friday, Mr Rajan said for four years -- 2012 to 2016 -- India was growing at a faster pace before it was hit by two major headwinds.

"The two successive shocks of demonetisation and the GST had a serious impact on growth in India. Growth has fallen off interestingly at a time when growth in the global economy has been peaking up," he said delivering the second Bhattacharya Lectureship on the Future of India.

A growth rate of seven per cent per year for 25 years is "very very strong" growth, but in some sense this has become the new Hindu rate of growth, which earlier used to be three-and-a-half per cent, Mr Rajan said.

"The reality is that seven is not enough for the kind of people coming into the labour market and we need jobs for them, so, we need more and cannot be satisfied at this level," he said.

Observing that India is sensitive to global growth, he said India has become a much more open economy, and if the world grows, it also grows more.

"What happened in 2017 is that even as the world picked up, India went down. That reflects the fact that these blows (demonetisation and GST) have really really been hard blows...Because of these headwinds we have been held back," he said.

While India's growth is picking up again, there is the issue of oil prices, the economist noted referring to the huge reliance of India on import of oil for its energy needs.

With the oil prices going up, Mr Rajan said things are going to be little tougher for the Indian economy, even though the country is recovering from the headwinds of demonetisation and initial hurdles in the implementation of the GST.

Commenting on the rising Non-Performing Assets (NPA), he said the best thing to do in such a situation is to "clean up".

It is essential to "deal up with the bad stuff", so that with clean balance sheets, banks can be put back on the track. "It has taken India far long to clean up the banks, partly because the system did not had instruments to deal with bad debts," Mr Rajan said.

The bankruptcy code, he asserted, cannot be the only way to clean up the banks. It is the only one element of the larger cleanup plan, he said and called for a multi-prong approach to address the challenge of NPAs in India.

India, he asserted, is capable of a strong growth. As such the seven per cent growth is now being taken granted.

"If we go below seven per cent, then we must be doing something wrong," he said adding that that is the base on which India has to grow at least for next 10-15 years.

India, he said, needs to create one million jobs a month for the people joining the labour force.

The country today is facing three major bottlenecks. One is the torn infrastructure, he said, observing that construction is the one industry that drives the economy in early stages. "Infrastructure creates growth," he said. Second, short term target should be to clean up the power sector and to make sure that the electricity produced actually goes to the people who want the power, he said.

Cleaning up the banks is the third major bottleneck in India's growth, he said.

Part of the problem in India is that there is an excessive centralisation of power in the political decision making, he said.

"India can't work from the centre. India works when you have many people taking up the burden. And today the central government is excessively centralised," Mr Rajan said.

An example of this is the quantum of decisions that requires the ascent of the Prime Minister's Office, he said, amidst mounting tension between the Reserve Bank and the finance ministry.

The RBI led by Governor Urjit Patel and the government have not been on the same page on different issues for some months now. The disagreements came out in open when RBI Deputy Governor Viral Acharya in a hard-hitting speech said failure to defend the central bank's independence would "incur the wrath of the financial markets".

It later emerged that the government had used a never-before-used provision of the law to seek resolution of issues, including the easing of NPA norms, so that banks can kick-start lending and support growth, and transferring more dividend to boost liquidity -- issues which the central bank thinks cannot be relented. 

INDIAN ECONOMY ― INTRODUCTION

FEATURES OF INDIAN ECONOMY

-Hemant Yadav

Nobel prize winner Sir Arthur Lewis said'economic development is always and everywhere about getting people out of agriculture and of agriculture becoming overtime a less important part of the economy.

In the contest of India this transition is still along way ahead, various indicators show that India is an underdeveloped country some of its basic features are as follow.

1) Low per capita Income

● India ranks at 123 position when it comes to per capita Income at PPP.

● The real per capita income is one of the  important indicator representing the           welfare of people of a country.

●According to economic survey it is expected to stand at the level of ₹8660 in the year 2017-18.

2) Occupational pattern

● Occupational distribution of population in India is not at all satisfying and clearly reflects the backwardness of the economy.

● In 1951 72.1% of the working population was engaged in agriculture sector and according to agriculture census the same proportion is still more than 60% in 2015-16.

3) Scarcity of capital

● India's unprecedented climb to historic high level of income and saving grades in the mid 2000 as been followed by pronounced gradual decline. This current episode of investment and saving slowdown is still ongoing. It is deterimental to growth of the economic 

● India's slow down is unusual in that it is moderate in magnitude and long in duration and started from a relatively high peak of 36% GDP.

● It has a specific in nature in the sense that it is a balance sheet related situation/slow down, in other words many companies have to curtail their investment because their finances have stressed as the investment they undertook during the boom have not generated enough revenue to allow them to service the debts that they have in curre.

4) Low level of Human Development

● Investment in human capital is a pre-requisite for a healthy and productive population for nation building being a developing economy there is not enough fiscal space to increase the expenditure on critical social infrastructure like education and health.

● India ranks 131 out of 188 countries in HDI with the score of 0.624.

5) Population

● A son "meta" preference that is parents may choose to keep having children until they get the desired number of son which is very much responsible for the growth of population in our country. The population of India over these years has increased roughly at the rate of 2.1% per annum.

6) Widespread unemployment

● Widespread unemployment perhaps the most striking symptoms of inadequate development in India the unemployment trade in country will stand 3.5% in 2018-19 as per ILO ''World Employment and Social Outlook Trends" despite the being the fastest economy the country is witnessing jobless growth.

7) Poverty

● According to World Bank Brooking Institute India is home to about 11.1% of extreme poor in the world. Although this figure is reducing but it is still painful.

8) Inequitable distribution of Income

●Income inequality reach historically high level in India, since 1980s. In year 2016-17  1 billionaire were created every two days this biggest increase in number of billionaire. 

● 82% of all wealth generated between the second quarter of 2016 to the second quarter of 2017 went to the top 1% according to latest survey 'Oxfam'. India is no stranger to income inequality but the gap is widening further.

9) Technological backwardness

● Science, technology and innovation are key drivers of economic performance and social development. India needs to transit from net consumer to net producer of knowledge. India spends only 0.6% of GDP on research and development well below the U.S 2.8%, China 2.1%, Israel 4.3% and korea 4.2%.

● In most developed country the private sector carries out the bulk of research and development even if government must play an important role however in India the government is not only primary source in research and development funding but also the primary users of these funds.

How GST and demonetisation impacted govt finances

Tax collections from goods and services tax (GST) have been underwhelming, and the government is set to miss this year’s fiscal deficit target.

Widening the tax base and collecting more taxes has been a priority for the current government at the centre. This government’s two major economic disruptions—the introduction of goods and services tax (GST) and demonetisation—were justified in the name of raising tax compliance among other things. However, these moves have not exactly turned out as planned and the government is set to miss its fiscal deficit target for 2018-19.

The Economic Survey released by the finance ministry earlier this year had lauded GST for widening the indirect tax base. The number of indirect tax payers rose by 50% in the first six months of GST implementation, estimated the survey, partly attributable to many small enterprises voluntarily choosing to be part of GST in order to avail input tax credits.

However, even with the wider base, GST collections have been underwhelming. Centre’s total indirect tax collections in the post-GST era shows a marked decline. Indirect tax collections (accruing to the centre) in April to September 2018 grew by only 1.8% from a year earlier, much slower than the 5.6% growth seen in 2017-18 full year and even lower than above 20% growth witnessed in the previous two years.

Prior to GST rollout in July 2017, the centre’s indirect taxes mainly consisted of customs duties, excise duties and service tax, almost in equal proportion. Now, more than 60% of centre’s indirect tax revenue comes from GST.

While indirect tax collections have lagged, direct tax collections have been robust. Evidently, the demonetisation shock in November 2016 did lead to an increase in income tax collections—both from individuals and firms.

However, this increase in tax revenues after demonetisation do not appear to be staggering enough or unprecedented to justify such a large-scale disruption. Part of the increase in direct tax collections in 2016-17, the year of demonetisation, can be attributed to the Income Disclosure Scheme 2016, as an earlier Plain Facts story pointed out.

Further, the rate of increase in direct tax collections post demonetisation has not been entirely unprecedented. The 18% growth rate in direct taxes achieved in 2017-18 was similar to the growth seen in 2010-11.

Growth in direct tax collections after demonetization has not been unprecedented

While the number of taxpayers jumped in the assessment year 2016-17, the growth rate fell to familiar levels in the next year.

Thus, it is too early to conclude whether demonetisation has led to any substantial or sustainable increase in tax compliance. The fact that more than 99% of all demonetised notes returned to the system also suggests that the exercise failed to bring much “black money”—i.e. tax-evaded income—into the tax net. This is because only a small portion of tax evasion is carried out in cash.

A January 2018 research paper by R. Mohan and others of the Centre for Development Studies (CDS) estimated that demonetisation could have taken out just 12% of the tax-evaded income in India . While the effects of GST and demonetisation on tax-compliance appear unclear, what is clear is the significant disruption these measures have caused.

Demonetisation disrupted economic activity and hurt growth, especially in areas with high share of informal activity, according to a 2018 World Bank research paper. The paper shows that in districts with more informal activity, local gross domestic product (GDP) fell by 4.7 to 7.3 percentage points in the quarter after demonetisation.

A recent Reserve Bank of India (RBI) study further suggests that demonetisation caused a “decline in the already decelerating credit growth of the MSME (micro, small and medium enterprises) sector”. The same report also highlights how GST implementation hindered MSME sector’s exports.

Apart from GST and demonetisation, the government’s zeal in raising tax revenue is also reflected in increased cesses and surcharges, which are not shared with states. The focus on taxation may seem excessive, as contrary to popular opinion, India is not necessarily a tax evading nation. India’s tax to GDP ratio is respectable among developing countries, when adjusted for income levels, as a previous Plain Facts story has pointed out.

Despite all these efforts, fiscal deficit for 2018-19 is likely to overshoot the targeted 3.3% of GDP given downbeat GST collections, disinvestment proceeds and limited scope to further tax petroleum products. A recent note by Upasna Bhardwaj, Suvodeep Rakshit and Avijit Puri, economists with Kotak Mahindra Bank, pegged the FY19 fiscal deficit at 3.5% of GDP, after factoring some reduction in government’s planned capital expenditure.

Cheer spurt in GST

TOO FAINT FOR COMFORT?

While the spurt in GST collection brings cheer, it must be be sustained to be impact dil

As the central government struggles to contain itsitwidening fiscal deficit, there is some good news on the revenue front. Goods and sevices tax collection in the month of october crossed the ₹1 lakh crore mark, with total collection for the month standing at ₹1,00,710 crore. 

This momentum, coming in the midst of a marginal increase in the total number of filing compared to september, is expected to be sustained in the coming months.

But all is not well on the revenue front. Tax revenue reached only 39.4% of the full year target by the end of September. The festive season too has failed to meet expectations as of now with many consumer- facing buisness reporting lacklustre sales.

The government should continue the effort to make the GST more taxpayer-friendly, bringing down the cost and hassle of compliance, to achieve a sustained rise in collection.