NEW DELHI, Jan 31:
The shock demonetisation will shave off a good 0.5 percentage point from GDP growth this fiscal, pulling it down to 6.5 per cent, Economic Survey said today while predicting “return to normal” 6.75-7.5 per cent in the next financial year and calling for bold tax cuts.
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.
“Even the likely reduction in the rate of real GDP growth of 0.25 percentage points to 0.5 percentage points (due to junking of old 500 and 1000 rupee notes) relative to the baseline of about 7 per cent still makes India’s growth noteworthy given the weak and unsettled global economy which posted a growth rate of a little over 3 per cent in 2016,” it said.
Indian economy had grown at a revised rate of 7.9 per cent in 2015-16 and was projected to grow by 7.1 per cent in the current fiscal by the Central Statistical Organisation, which did not account for disruption caused by demonetisation.
“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 tomorrow.
For the 2017-18 fiscal, beginning on April 1, it 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.”
Listing surge in global oil prices and possible eruption of trade tensions amongst the major countries as risks, it said investment-to-GDP ratio has not just been lower than the desirable levels but has been consistently declining over the last few years.
Also, it said, the savings rate has to be raised so that investment can be financed without resorting to high dose of external financing.
Chief Economic Adviser Arvind Subramanian, who led the team that prepared the Economic Survey 2017-18, termed the move to scrap 86 per cent of the cash in circulation a “radical currency-cum-governance-cum social-engineering measure”.
Stating that the forecast for next fiscal beginning April 1 had downside risks in the extent to which the effects of demonetisation could linger, he said the GDP numbers may not fully reflect the “real and significant hardships” caused by demonetisation in the informal sector.
“The first advance estimates released in early January 2017 (projected GDP growth rate of 7.1 per cent for 2016-17) were arrived at mainly based on data prior to demonetisation and largely reflect the economic situation prevailing in the first seven to eight months of the financial year,” the Survey said.
India managed to achieve high growth amidst the global slowdown, along with a macro-economic environment of relatively lower inflation (unlike a generally higher inflation in the previous episodes of high growth), moderate current account deficit coupled with broadly stable rupee- dollar exchange rate and the economy treading decisively on the fiscal consolidation path, it said.
“The outlook for the next financial year suggests that growth is set to recover, as the currency in circulation returns to normal levels and taking into account the significant reform measures initiated by the government,” it said.
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,” the Survey 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. (PTI)