Cautioning the Government about the possible fallout of “historic and unprecedented” note ban move, the Economic survey on Tuesday termed demonetisation as ‘stick’ which needs to be complemented with ‘carrots’ if India has to grow at 8-10 per cent in the long term. The Government is expected to have a possible gain on the demonetisation impact in a year or so if some follow-up actions are carried out in a proper manner. The survey has also suggested a five-pronged strategy to be adopted by the Government, including implementation of Goods and Services Tax (GST), reducing individual and corporate tax rates, widening tax net, improving tax administration etc.
There are some follow-up actions to minimise the costs and maximise the benefits, which 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. These actions would allow growth to return to trend in 2017-18, following a temporary decline in 2016-17, observed the Economic survey tabled in Parliament by Union Finance Minister Arun Jaitley ahead of Union Budget 2017-18 to be unveiled on Wednesday.
At the same time, throwing further caution, the survey also forecasted that the demonetisation impact can be negative in short-term with the loss of country’s GDP growth to 6.5 per cent this fiscal and falling demand as well. 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.
Calling for bold cut in tax rates, the pre-Budget pointer said that India’s economic growth is likely to dip to 6.5 per cent this fiscal as aftershock demonetisation shaved off a good 0.5 percentage points but it will rebound to 6.75-7.50 per cent in the next financial year. 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.
“Given the uncertainty after demonetisation, we provide a range of 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,” the survey said.
Suggesting some key follow-up actions by the Government, the survey also said 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 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,” said the survey, adding that tax administration could be improved to reduce discretion and improve accountability.
India’s 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.
For the 2017-18 fiscal, beginning on April 1, the Survey put the real GDP growth at 6.75 per cent to 7.5 per cent range. “Even under this forecast, India would remain the fastest growing major economy in the world. 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,” the survey said.
However, Chief Economic Adviser Arvind Subramanian labelled demonetisation on November 8 as an ‘unusual and unprecedented’ monetary experience and its impact should be judged cautiously. “It was a very unusual experiment in monetary history.
“We should be cautious about assessing its impact. Demonetisation has affected different forms of money very differently. The note ban has also led to reduced cash and increased supply of deposits simultaneously. As a consequence of that, the lending rate has come down by 90 basis points,” he said.
Throwing light on economy, Subramanian said, “It’s fair to say there have been short-term costs to demonetisation that were significant, especially in the informal sector. But the effect is temporary. As remonetisation happens, the economy will be back on track.”
On realty sector, he said demonetisation is aimed at bringing down real estate prices. “In real estate you do see a blip in prices, sales and launches and of course some of it may be adverse to the economy but in the long, some of that could be good because aim of the demonetisation is to bring down real estate prices,” he said.
While sowing of rabi crop is way better than last year and there is no blip in direct and indirect tax collections after demonetisation, there is a dip in real estate sector and banks credit has dropped. “The overall picture is mixed. Any uncertainty from demonetisation needs to be addressed. But it holds the potential for long-term benefits. It would require follow-up actions to minimise the costs and maximise the benefits,” he added.
Assuring the full remonetisation of the country in the next 1-2 months, he advocated quick removal of all cash withdrawal limits to expedite pick-up in growth. “In a month or two, we should be close to full remonetisation of the economy,” he added.
Sounding a note of caution on the Government’s digital push, the Economic Survey said that digitalisation is ‘not a panacea’ and cash is not all bad and stressed the need to forge a balance between both forms of payments. But Subramanian said that the push to digital payment must be continued and 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, adding that at every stage there has to be a balance between the cost and benefit of cash versus digitalisation.
The Survey also advocated the concept of Universal Basic Income (UBI) as an alternative to the various social welfare schemes in an effort to reduce poverty. Invoking Mahatma Gandhi’s vision of ‘wiping every tear from every eye’, it made a pitch for implementing UBI to entitle the poor with at least some income and thus eliminate poverty.
The Survey prepared team led by Subramanian also listed surge in global oil prices and possible eruption of trade tensions among the major countries as other risks. Despite the downside symptoms, it said that economic growth is expected to return to normal as new currency notes in required quantities come back into circulation. “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.
Meanwhile, launching ‘Operation Clean Money’ project by Central Board of Direct Taxes (CBDT) to tab black money in the system, Revenue Secretary Hasmukh Adhia said, “Operation Clean Money is a programming software which will be used to get answers on all the deposits made and only after preliminary answers from the people, if need be, we would take legal action against those people. The CBDT, with data analysis and profiling of assessees, will send e-communications to people whose cash deposits post November 8 note ban do not match their income.”
Pointing out the global crude factor, the Survey also said that 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. “The scope for monetary easing might also narrow, if higher oil prices stoked inflationary pressure,” it added.
On GST, it said, “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.”