Growth drivers

DeMo and GST will increase the share of the formal sector in the economy, setting the stage for double-digit expansion

When an economic adviser to the UPA government cites anecdotal evidence of return of cash in horse racing post demonetization to support his critique, the obvious inference is the inability of the conventional thinkers to come to grips with a phenomenon that is so rare that there is hardly any research to draw upon to offer historical context. Similarly, when two Noble laureates differ on the after-effects, the conclusion is that the recall of high-value bank notes is not a random act but a bold initiative that had as much chance to succeed as to fail. Some have blamed plunging vegetable and food grain prices to sucking of liquidity by DeMo. A normal southwest monsoon after two consecutive years of drought is also responsible for farmers’ plight of plenty just as early rains and shift to other remunerative crops have fueled a surge in prices of select vegetables and not just the gradual normalization in money supply to the pre-DeMo levels. Perhaps it would be useful to rewind to the fiscal ended March 2009 (FY 2009), when then Union Finance Minister P Chidambaram took banks’ Rs 60000-crore exposure to the agriculture sector on the Central government’s balance sheet. It was the second such instance in the history of independent India but the first post liberalization. The February 2008 budget announcement followed despite an above-normal monsoon of 106% of the long-period average in the calendar year (CY) 2007 and the gross domestic product (GDP) was on the way to expand 9.3% in FY 2008, marginally down from the previous year. Importantly, there was no shocker such as DeMo in the preceding year.

In fact, the flagship program of the UPA government, Mahatma Gandhi National Rural Employment Guarantee Scheme, was to be rolled out in all districts of the country in FY 2009, after its initiation in CY 2005, with an open-ended allocation of Rs 16000 crore for the year. More than Rs 75000 crore was spent on the rural sector in the fiscal. The liberal cash infusion should have proved a booster dose for the economy. Instead, the GDP plunged to 6.7% in FY 2009. Fiscal deficit spurted to 6% of GDP from 2.7% in FY 2008. A contributor could have been the meltdown of the global financial system in September 2008. The common thread between the loan waiver nearly a decade ago and the spate of loan write-offs by some states now is good monsoon. The lesson is that farmers’ distress can arise due to crop failure as well as surplus output. DeMo was never intended to be a short-term solution to improving India’s fiscal health. It was one of the pawns to wean the country away from its cash addiction. It would have been surprising if there were no inventory pile-up as the tax-free wealth became useless or had to be declared. Rather than impatiently waiting for the Reserve Bank of India’s numbers of how much cash came back into the system and how much did not to assess the black money in circulation, the temporary slump in demand should be taken as a validation of the role of the parallel system in moving the economy without corresponding benefit to the exchequer.

Right now, only about a quarter of those filing returns declare income above Rs 5 lakh. The finance ministry has revealed more than Rs 2 lakh was deposited in 60 lakh bank accounts and Rs 25000 crore cash was found in dormant accounts. As many as 90 lakh new tax payers were added. The last-mile generator of cash is the link between the formal economy and the consumer. Following the implementation of the goods and services tax (GST) from 1 July 2017, part of the tax burden of the corporate sector will shift to the retail goods and services provider. Despite estimated to account for half of India’s output, the shadow economy does not get reflected in the GDP numbers. To avoid detection, refuge was sought in real estate and gold. Increased revenues from a widened tax base will allow more spend on infrastructure, a powerful propellant for consumption. Double-digit growth can be sustained even in a low-inflation climate. Though limits have been placed on cash withdrawals and deposits per account, no economy registers 100% cashless transactions. The effort should be to keep the share of physical paper to the minimal by nudging Indians towards digital transactions through fear or incentives. The raids following DeMo have put tax evaders on the edge. GST has offered the sweetener of input credit to suppliers if the receivers, too, become tax-compliant. Together, both are potent instruments to put India firmly on the growth track.

By Mohan Sule