It has never happened before in India. For the first time in the span of a month, this August, both India’s fiscal and monetary authorities are offering their take on the economy one after the other. In those takes, the Finance Ministry and the Reserve Bank of India (RBI) analyse two events which have impacted the Indian economy like nothing else before. Those are demonetisation and the goods and services tax (GST), which came one after another in quick succession within a year.
In the process, the Finance Ministry and the RBI will answer the big question – has demonetisation and GST reforms slowed the Indian economy further, or has the economy begun to dust off its slowdown? The answers will impact how the government will tweak its taxes and give us a peak into how RBI will set the interest rates for the economy.
The fiscal authority, i.e., the Finance Ministry, was the first off the block. On Friday (11 August), Finance Minister Arun Jaitley tabled Volume II of the Economic Survey in Parliament. At the end of the month, RBI will release its annual report. It will be most interesting to see how congruent are the interpretations by the two authorities of these two seminal events.
There was a particular set of circumstances why the Volume II of Economic Survey has made its appearance this year, almost in the middle of it. The Survey is traditionally presented just before the budget each year. This year too it happened in January except, as what the Chief Economic Adviser Arvind Subramanian described it, it was only the analytical part of the Survey and promised there will be a second part or Volume II.
This is what was tabled yesterday (12 August). It is traditionally the less glamorous segment of the Survey. It offers a synoptic round-up of the data and the year gone by. However, in the process of shifting the budget year, the definition of the year itself has begun to change, which means the reference framework has also changed. Thus, breaking with tradition, Subramanian has included an introductory chapter to the volume. And it is here that he has offered an assessment of demonetisation and of GST. As he points out in the preface, “Whether this practice of issuing two volumes continues will depend in part on the future timing of the Budget calendar.”
As expected, a large segment of the book examines the economy through the prism of demonetisation and GST. Through six sections, the Survey examines the impact on payment habits (digitalisation), going on to an assessment of stressed sectors like power and telecom, to finally the trends in GDP growth rates. According to the Survey, “It is clear that there has been a substantial increase in digitalization across all categories. And even though the immediate post-demonetization surge has moderated in some cases, the level and pace of digitalization are still substantially greater than before demonetization”. Cash as a share of GDP and money (M1) has declined; the former has gone down by about 1.6 percentage points down from 11.3 per cent and the latter by 5 per cent, it notes.
Similarly, the universe of income taxpayers has risen post-demonetisation, the Survey concludes. “The rise was significantly greater than in the previous year (45 per cent versus 25 per cent). The addition amounted to about 5.4 lakh taxpayers or 1 per cent of all individual taxpayers in just a few months”.
The most interesting observations pertain to GDP. Subramanian’s team find a “demonetisation puzzle raised by the GDP estimates”. According to them, while real growth decelerated, “the slowdown was much smaller than expected: growth for the year as a whole was much higher than range of 6.5-6.75 estimated in the Economic Survey 2016-17, Volume I”. Even more striking is the evidence that nominal GDP growth actually accelerated after demonetisation. And there is no large-scale slowdown in the informal sector, especially in states like Uttar Pradesh. “The striking absence of any demonetization effect in Uttar Pradesh seems to have been related to what happened in the beginning of the year when MGNREGS employment surged relative to previous years”.
These are powerful results on the basis of which the Survey tries to figure if the current GDP growth of 7 per cent-plus can be maintained. It points out, “In the last 2 years, real GDP growth has averaged about 7.5 per cent. But this has been achieved against the context of weak investment, export volume and credit growth. This wedge between steady growth and its underlying (relatively weak) drivers raises a question and also poses a puzzle”, how growth runs in such anaemic conditions. Analysing cross-country experience, it notes, “While the current configuration is certainly unprecedented in cross-country experience, sustaining current growth trajectory will require action on more normal drivers of growth such as investment and exports and cleaning up of balance sheets to facilitate credit growth.”
It therefore posits that to maintain the rate of growth of GDP, both the interest rates have to stay soft and credit has to grow to make large-scale investors, both public and private, add to their capacity. That capacity will in turn create jobs. Because if the 2019 elections are to be fought on jobs, the people need to be informed whether the government knew what it was setting them up for when it ordered these two tough measures.
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