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22 August, 2017

Reforms slow down economy

BRP Bhaskar
Gulf Today

While the authorities have not come out with the full data, there is enough material in the public domain to conclude that two reforms of the past year, demonetisation of high-denomination currency notes and roll-out of the new goods and services tax (GST) regime, have retarded the growth of India’s economy.

Nine months after Prime Minister Narendra Modi announced demonetisation and a time-frame for collecting new notes of Rs 2,000 and Rs 500 in exchange for the invalidated notes of Rs 1,000 and Rs 500 neither the government nor the Reserve Bank of India, which regulates currency flow, has revealed how much money was replaced. The last time RBI Governor Urjit Patel spoke on the subject, he said the notes were still being counted.

One of the proclaimed objectives of demonetisation was to weed out black money. It was believed the authorities were reluctant to reveal data as more money had come in than the RBI had put into circulation. This would mean that those with black money used the opportunity to launder their holdings.

In his Independence Day address last week, Modi confirmed this. He said following demonetisation Rs 3 trillion had come to the banks, including two trillion of black money.

The story has a bright side, though. Scrutiny of the data gathered by the government in the process of exchange of notes has revealed the existence of about 300,000 shell companies used by black money operators.

Also, as many as 1.8 million people were found to possess assets not commensurate with their known sources of income. One-fourth of them had accepted the finding, Modi said.

Figures released by the Finance Ministry last week show that the number of persons who file income tax returns now stands at 28.2 million. This is 5.6 million more than a year ago.

The government has said the new GST regime, introduced on July 1, has eased the logistics of businesses, and brought in 1.35 million new commercial tax payers.

Financial analysts are not inclined to take the claim that the reforms have led to increased revenues unquestioningly. Some of them have pointed out that, as of August 2017, there is no significant increase in the number of taxpayers or direct tax collection.

It is, of course, too early to dismiss the government’s claim as flow of information through official channels is notoriously slow. Assuming that demonetisation and GST have yielded financial benefits to the government, the question whether adequate preparations were made before the two measures were introduced is still relevant. Both measures had caused considerable dislocation of economic activity and imposed enormous hardship on the people, particularly the poor.

Figures for the first quarter of 2017 put the economic growth rate at 6.1 per cent as against earlier expectations of 7.1 per cent. This was the lowest growth rate since the last quarter of 2014. The fall was the result of the drop in consumer spending and investment following demonetisation.

Falsifying recent history to serve his political interests, Modi often accuses the Congress, which ruled the country longest, of not doing enough on the development front. Many young people, disillusioned with the state of the country, readily swallow such claims.

Statistical data shows that in the 65 years since Prime Minister Jawaharlal Nehru launched the first five-year plan in 1951 India’s GDP grew at an average annual rate of 6.1 per cent. The lowest growth rate of minus 5.2 per cent was recorded in the last quarter of 1979 under Charan Singh who was Prime Minister for nearly six months after the collapse of the Janata government headed by Morarji Desai. The economy recorded the highest growth of 11.40 per cent in the first quarter of 2010 under Prime Minister Manmohan Singh.

Earlier this month the government, which, as usual, placed before Parliament an annual economic survey in February, took the unusual step of presenting a revised mid-year survey highlighting factors adversely affecting the economy. It said services sector growth, which was highly resilient even during the global financial crisis, was showing moderation. -- Gulf Today, Sharjah, August 22, 2017

Putting on a brave face, the government’s chief economic adviser, Arvind Subramanian, told an interviewer that the medium term outlook looked good but there were worries for the near term as the economy, which was decelerating, was heading towards deflation. That sounds like a warning to fasten the seat belts.

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