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The Case of Twin Shocks and Economic Slowdown
There is an atmosphere of panic owing to the unpredictability of the economic trajectory of the country, buttressed by two radical steps that have affected the economy- 1. Demonetization, and 2. Goods and Services Tax (“GST”). Furthermore, recently the Reserve Bank of India (“RBI”) reduced the growth forecast for the fiscal year ending March 2018 to 6.7% from 7.3%.
Demonetization
This refers to the announcement by the government on November 8, 2016, that the 500 and 1000 denomination rupee notes then in circulation were no longer valid legal tender. They were replaced by new notes of Rs. 500 and Rs. 2,000 gradually. The objectives were to tackle the menaces of money laundering, use of ‘black money’ for funding terrorist activities, and counterfeit currency being circulated in the economy.
Goods and Services Tax
This is the new indirect taxation system that became effective in India from July 1, 2017, under the banner- ‘One Nation, One Market, One Tax’. It has brought certain State and Central taxes levied on goods and services, for example, the State Value Added Tax (“VAT”), Luxury Tax, Central Excise Duty – under one umbrella. The GST will be levied separately but concurrently by the Centre and the States (including Union Territories with legislatures). In preparation of the GST, the 101st Amendment was passed to the Constitution in 2016, constituting a GST Council. The objectives are to remove double taxation, reduce tax burden on goods and services, ease filing of tax returns and move towards a unified market.
Two sides to the story
- The economy is in shambles
Several economists, including former Finance Ministers, have questioned the progress of the economy recently. Former Prime Minister Manmohan Singh opines that both demonetization and GST have had some adverse effect on India’s Gross Domestic Product (“GDP”). Referring to the note ban, he said, “So when 86 per cent of currency is withdrawn from circulation, plus GST, which was put in practice in haste.. lot of glitches are now coming up, it was bound to affect GDP growth adversely.” Similarly, former RBI governor Raghuram Rajan estimated that India’s GDP had taken a hit of between 1 to 2 per cent due to demonetisation, which translated to a sum of around Rs. 2 lakh crore. In his book, ‘I do what I do’, he has disclosed that he never supported the demonetization move and had warned the government against it.
Perhaps the most stinging attack came from senior BJP leader and former Finance Minister of India, Yashwant Sinha. He criticized the government for accelerating the slowdown of the already slowing economy through demonetization, allocation of excessive responsibilities to Arun Jaitley, the Finance Minister, fearmongering via the income tax department post-demonetization and so on.
Following the implementation of the GST, there have been glitches such as problems in IT infrastructure for filing tax returns, time lag in tax refund, and lack of a concrete setup due to constantly evolving rules and rates.
Also, both demonetization and the introduction of GST have sent major shocks through the unorganized sector, where a majority of India’s population is employed. Former Prime Minister Manmohan Singh also stated that these moves have affected the informal sector that is responsible for 40% of India’s GDP and where 90% of employment is there.
- The economy will recover
The sustained attacks on the economic policy of the ruling government have led to equally vehement claims by the government that all is well. Prime Minister Narendra Modi defended the attacks stating that creating an atmosphere of gloom over one quarter of slow growth was unjustified. He has said that the fall in economic growth will be reversed by continuing the programme of reforms. He also allayed fears regarding compliance with GST, promising to address all concerns related to the implementation of the GST.
Responding to the in-house criticism (by Yashwant Sinha) and criticism by P Chidambaram, without naming either of them, Arun Jaitley accused both of “acting in tandem” and hinted at the former being a job applicant at 80 years of age.
In what was anticipated to be a masterstroke, an editorial to counter Yashwant Sinha’s narrative was authored by his son, currently Minister of State for Civil Aviation and formerly the Minister of State for Finance. Jayant Sinha argued that the government’s policies were aimed at bringing about ‘structural’ reforms that are ‘transformational’ in nature.
Measures being taken
As regards GST, the Prime Minister has asked the GST Council to review all the problems arising with respect to the GST and has further assured traders that the government is not opposed to necessary changes to simplify the system.
Leading on from here, foreign investment in India will also play a key role in providing the much-needed fillip to the economy. The government has been taking steps to ease FDI inflow, such as streamlining the process of bringing in FDI by abolishing the Foreign Investment Promotion Board, and instead, arranging for investment proposals to be vetted by the ministries concerned as per the Standard Operating Procedure. Moreover, start-ups and brownfield ventures (where, unlike greenfield ventures, the investors do not have to worry about establishing a new set-up from scratch) are booming in India and will continue to attract foreign investors, in all likelihood.
At the World Economic Forum’s India Economic Summit, at least two co-chairs of the summit have raised concerns about the lack of jobs, layoffs among top firms and lack of easy bank credit for small and medium enterprises. These factors, in turn, have also led to general discontentment with the status quo in the economy. This has been countered by Railway Minister Piyush Goyal who has emphasized that “the youth of tomorrow is not looking to be a job-seeker alone. He wants to be a job-creator.”
Above all, the government should be mindful of the fact that the impact of the policies on all sectors has to be monitored and measures should be taken accordingly. And like any other policy, the key to success lies in good planning and implementation.
While all this sounds very well, only time will tell how far these so-called ‘teething’ problems will stretch and whether these radical changes will ultimately result in a positive-sum game.
