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Public investments and welfare will surge

From time to time, IE organises roundtable discussions on current and emerging issues. Recently, we had one on the state of and outlook for the economy. A report:

Public  investments and welfare will surge

The slow down of economic growth consequent upon demonetisation and  the introduction of the GST would be felt over the short term. GST tax rate corrections would bide time. While note-wapsi has bloated cash in banks, demand for credit is slack, said Editor S Viswanathan in his introduction of the subject.  

Agricultural production grew over 5 per cent last year, but current year estimates are at the familiar 3 per cent. This reduction has a sparse effect on GDP growth, as agriculture contributes only 15 per cent to the GDP.  However, with more disposable incomes in the hands of the rural population, demand for consumer goods has increased. Correlate this with the record sale of three lakh two-wheelers by Hero Motors on a single day and record sales of two-wheelers in April-September. The increase in demand for consumer goods is a good augery, he said.  

 

Fiscal stimulation difficult 

K P Geethakrishnan, former Executive Director-IMF, forecast that the economy might grow at 6 per cent over the short term.  He pointed to the experience of Japan: “the asset price bubble burst in 1995 and Japan is still struggling to come to positive growth territory. Ditto would  happen in India. Taming the NPA, along with implementation of the bankruptcy law, seems to impact growth,” he said.

With lok Sabha elections due in 2019, the party in power will try to accelerate step up welfare expenditure. This will affect GDP growth. KPG also opined that quantitative easing is not feasible over the short term as the RBI is trying to control inflation. 

 

A surge of reforms without consolidating gains

S S Gopalarathnam, Managing Director, Cholamandalam MS General Insurance, expressed concern over the government introducing significant changes without addressing the effect of the changes and their impact on production, sales and consumption of goods and services on the introduction of GST  and demonetisation.” While the objectives of these measures were right, their implementation was terrible. Bankers took money to help covert currency notes.  With the restriction on withdrawal of cash by bank customers, consumption reduced, demand evaporated and production severely impacted. Several sectors, most notably real estate, has been severely affected. 

“Earlier indirect taxes were based on the origin of sale but now it has become destination-based. In the old system we had centralised data on receipts and allocated transactions to the states; there was an agreed formula to transfer revenue collected. The new GST system may be okay for goods but extremely poor for services. Service tax is centrally paid, but companies have to open registration in 30 states.  Imagine the scope for state officials to harass managers! 

“The government should have categorised commodities and industries into labour-intensive and capital-intensive activities and devised the rates to encourage job growth. 

“While the Congress suggested a ceiling of 18 per cent, the new regime fixed a high 28 per cent and over and above levied extra for luxury items. The result is a very high rate of indirect taxation that would encourage tax evasion.

“With an efficient IT network, a single rate of taxation should have been introduced.  We missed the golden opportunity to spur consumption by a simple, single, rational rate. The government laboured hard to take VAT and Central taxes and worked on neutral tax rate for each commodity. I would suggest a neutral rate common for most commodities at 10 per cent, a merit rate of 5 per cent and demerit rate of 15 per cent.  The lower rate could be used to spur consumption and growth,” said SSG.

With NPA mounting the government should bring in structural changes and consolidation of banks at greater speed, SSG opined.

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