Economic Survey says country’s growth is likely to dip to 6.5 per cent this fiscal after shock demonetisation shaved off a good 0.5 percentage points but it would rebound to 6.75-7.5 per cent in the next financial year and called for bold cut in tax rates.
The pre-Budget pointer called for cut not just in individual income tax rates and a timetable for reducing the corporate taxes but also for widening the net to progressively encompass “all high incomes”. Though the Survey did not indicate what it meant by all high incomes, the reference may be to agriculture income which is currently out of the tax net.
Invoking Mahatma Gandhi’s vision of ‘wiping every tear from every eye’, it made a pitch for implementing Universal Basic Income (UBI) to entitle the poor with at least some income and thus eliminate poverty.
“Given the uncertainty (after demonetisation), we provide a range: a 0.25 percentage point to 1 percentage point reduction in nominal GDP growth relative to the baseline of 11.25 per cent; and a 0.25 percentage point to 0.5 percentage point reduction in real GDP growth relative to the baseline of estimate of about 7 per cent,” it said.
Indian economy had grown by 7.6 per cent in 2015-16 and was projected to grow by 7.1 per cent in the current fiscal by the Central Statistical Organisation (CSO) that did not fully account for the disruption demonetisation had caused.
“Over the medium run, the implementation of the GST, follow-up to demonetisation, and enacting other structural reforms should take the economy towards its potential real GDP growth of 8 per cent to 10 per cent,” said the Survey tabled in Parliament by Finance Minister Arun Jaitley ahead of Union Budget 2017-18 to be unveiled on Wednesday.
Confident of economic recovery post demonetisation, Chief Economic Adviser Arvind Subramanian said remonetisation will be completed in a month or two and growth will pick up once the process is over.
The demonetisation is an “unique experiment in monetary history” and 50-100 PhDs thesis would be written on it after five years, Subramanian added.
He said as against the perception, cash crunch was less severe in November, the month demonetisation was effected, than December.
The Chief Economic Adviser, while addressing the media after the pre-Budget economic Survey was tabled in Parliament, said there has been short-term cost of demonetisation on unorganised sector, but potential for long term benefits are high.
He said scrapping of the old high denomination notes will lead to increased financial savings and corruption is expected to decline.
India’s economic growth is likely to dip to 6.5 per cent this fiscal as shock demonetisation seems to have shaved off a good 0.5 percentage points.
“As remonetisation happens the economy will recover back. I think there should be a fast remonetisation. The earlier we withdraw the limit on the cash, the better,” he said.
He further said the push to digital payment must be continued, “but I think one must be careful there”.
“The transaction has to be gradual. It must be inclusive because there are a lot of people who are not digitally connected. I have preference for doing it through incentives rather than controls,” he said.
For the 2017-18 fiscal, beginning on April 1, put the real GDP growth at 6.75 per cent to 7.5 per cent rage. “Even under this forecast, India would remain the fastest growing major economy in the world.”
The forecast, however, had downside risks in the extent to which the effects of demonetisation could linger into next financial year, especially if uncertainty remains on the policy response.
“Currency shortages also affect supplies of certain agricultural products, especially milk (where procurement has been low), sugar (where cane availability and drought in the southern states will restrict production), and potatoes and onions (where sowings have been low),” the Survey said, asking the Government to be vigilant on prevent other agricultural products becoming what pulses was in 2015-16.
It also listed surge in global oil prices and possible eruption of trade tensions amongst the major countries as other risks. Prepared by a team led by Chief Economic Adviser Arvind Subramanian, the Survey said economic growth is expected to return to normal as new currency notes in required quantities come back into circulation.
The pre-Budget document said demonetisation is also very unusual in its monetary consequences.
“It has reduced sharply, the supply of one type of money — cash — while increasing almost to the same extent another type of money — demand deposits. This is because the demonetised cash was required to be deposited in the banking system,” it said.
To ensure that demonetisation indeed proves a catalyst for long-run changes in behaviour will require measures to complement with other non-punitive, incentive-compatible measures that reduce the incentives for tax evasion.
“Demonetisation was a potentially powerful stick which now needs carrots as complements,” it said prescribing a five-pronged strategy.
It includes implementing Goods and Service Tax (GST) with broad coverage to include activities that are sources of black money creation — land and other immovable property. Also, individual income tax rates and real estate stamp duties should be reduced while a timetable for reducing the corporate tax rate could be accelerated, the Survey said.
“The income tax net could be widened gradually and, consistent with constitutional arrangements, could progressively encompass all high incomes. (After all, black money does not make fine sectoral distinctions),” it said.
Besides, tax administration could be improved to reduce discretion and improve accountability, it added.
Oil price rise to $60-65 per barrel could lead to reduction in consumption in India, less room for public investment and lower corporate margins, thereby further denting private investment, said the Survey.
“The scope for monetary easing might also narrow, if higher oil prices stoked inflationary pressure,” it added.
It termed the passage of Constitutional amendment, paving the way for implementing the transformational GST, and demonetisation of old Rs500 and Rs1,000 notes as major domestic policy developments of the year.
“The GST will create a common Indian market, improve tax compliance and governance, and boost investment and growth; it is also a bold new experiment in the governance of India’s cooperative federalism,” it said.
Demonetisation, it said, has had “short-term costs but holds the potential for longterm benefits”.
“Follow-up actions to minimise the costs and maximise the benefits include: fast, demand-driven, remonetisation; further tax reforms, including bringing land and real estate into the GST, reducing tax rates and stamp duties; and acting to allay anxieties about over-zealous tax administration,” it said.
These actions would allow growth to return to trend in 2017-18, following a temporary decline in 2016-17, it said.