Demonetisation and GST will hurt India's economic growth in 2017

The only certainty is uncertainty.

 |  3-minute read |   30-01-2017
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There is new research that buttresses the belief that everything about the Indian economy may not be as hunky-dory as the government would like to have us believe. The reasons for these are not too difficult to find.

For one, the economic disruption caused by demonetisation is likely to continue through the fiscal year 2017-18 and many say India would be lucky to get away with its economy growing at around 6-6.5 per cent over the next couple of years.

The other is the Goods and Services Tax (GST) that aims to simplify the indirect tax structure, but will be immensely disruptive in the first few years of its implementation as several business segments now out of the tax ambit get included within it purview.

A combined impact of demonetisation and GST can be quite unsettling for the economy, but if both help in bringing more under the tax ambit, in a country where tax payers are believed to constitute only one per cent of the total population, then the pains would be worth it over the long term.

One of the reasons why market research firms such as Credit Suisse are cautious about the overt optimism that the government displays when it comes to the positive impact of the combined demonetisation-GST is that there is rarely an analysis done on the cascading effect that the moves have on different sectors of the economy.

atmbdpti_013017033006.jpg The economic disruption caused by demonetisation is likely to continue through the fiscal year 2017-18.

Examine the case of real estate and demonetisation, for instance. The real estate segment contributes, says Credit Suisse, 13 per cent to the country’s GDP, and any negative impact in the sector is bound to hit the economy hard. The hunt against black money has stifled operations in the segment quite significantly. Already, quite a few real estate companies had been struggling as loans to the sector dried up and buyers postponed their purchases.

It would be unfair to say all these players are "non-serious". With the note ban and further regulations such as the Real Estate (Regulation and Development) Act, and the Benami Transactions (Prohibition) Amendment Act, the churn in the sector will be humongous. While these regulatory measures have been largely welcomed by top industry players and the consumers alike, the note-ban was something totally unanticipated, and the jury is still out on its long term impact.

As a result of this, economic growth is expected to be hurt longer than current market expectations. The other factors that contribute to this uncertainty are the disruption of the informal sector from the note ban, and the continued stress on the banking system.

The GST, to be rolled out in July 2017, is expected to keep businesses engaged in the transition for several months, if not quarters. Add to this the major concerns of the global economy – the inward-looking policies of US President Donald Trump, the likely triggering of Brexit and Chinese economic policies, and the next couple of years will truly be marked by uncertainty.

It will take more of sound policies and less of rhetoric to tide over these tough times.

(Courtesy of Mail Today.)

Also read: What our government - or Budget 2017 - won't reveal about all the cess you pay



MG Arun MG Arun @mgarun1

The writer is Deputy Editor, India Today.

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