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Why The Reserve Bank Cut India’s 2018 Growth Rate To 6.7%

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People wait outside a bank in central Mumbai a few days after demonetisation–withdrawal of 86% of India’s currency by value. We look at what demonetisation and the goods and services tax–which unified India into a common market–promised but did not deliver in 2017.

 

With farm-produce prices falling after an increase in the 2017 monsoon–or kharif–crop, the muddled implementation of a new nationwide tax and the effects of the November 2016 withdrawal of 86% of India’s currency by value, India’s real growth rate for 2017-18 is 6.7%, down from 7.3% in August 2017.

 

“The loss of momentum in Q1 of 2017-18 and the first advance estimates of kharif foodgrains production are early setbacks that impart a downside to the outlook,” said an October 2017 Reserve Bank of India (RBI) report. “The implementation of the GST (goods and services tax) so far also appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term.”

 

The monsoon harvest of 2017 was 135 million tonnes, up 23% and the largest ever since 2010.

 

When the RBI cut its growth forecast, the International Monetary Fund and World Bank followed, lowering growth projections to 6.7% and 7%, respectively, citing the aftermath of demonetisation and the introduction of GST.

 

The impact of demonetisation–the withdrawal of 86% of India’s currency, by value, in November 2016–led to widespread job losses and depressed the economy, particularly in rural and semi-urban areas and mainly felt by small traders and farmers (Read here and here).

 

A crackdown on black money (or unaccounted income) was one of demonetisation’s objectives, which kept changing, as IndiaSpend reported in December 2016. There is no clear information on the black money it identified, according to official data. While GST unified India into a common market, implementation slowed down businesses and impacted traders.

 

Demonetisation: Success or failure? The debate continues

 

Demonetisation had three objectives: To curb black money and corruption and suppress terror funding, Prime Minister Narendra Modi said in his address on November 8, 2016.

 

Of Rs 15.44 lakh crore demonetised currency, about 99% or Rs 15.28 lakh crore came back as on June 30, 2017, according to the RBI annual report 2016-17, as we reported on September 5, 2017.

 

This indicates that only 1% of demonetised currency did not return to the central bank.

 

While critics of demonetisation said the government failed to bring back black money, supporters said the move cannot be assessed on the single parameter of notes returned.

 

Demonetisation hits farmers and small traders

 

By November 2017, farmers had to wait for at least two weeks for cheques to be cleared, putting them under more debt.

 

This deepened the farming crisis, as most farmers could not repay loans. Only 9% of loans were repaid in 2017 compared to 70% in 2016, cash reserves are down and bad debts up, we reported on November 11, 2017.

 

Small shopkeepers were still facing losses from demonetisation; GST has made goods expensive thus reducing their profits, IndiaSpend reported on November 10, 2017.

 

A year later (October 27, 2017), currency notes worth Rs 16.35 lakh crore (value) were in circulation, or about 91% of Rs 17.97 lakh crore in circulation on November 4, 2016 before demonetisation.

 

Crackdown on black money continues

 

The income tax department seized assets worth Rs 900 crore and undisclosed income of Rs 7,961 crore through searches conducted on around 900 groups between November 2016 and March 2017, according to this reply to the Rajya Sabha (upper house of Parliament) on December 19, 2017. As many as 8,239 surveys–which do not involve seizure or confiscation of cash/jewellery or assets as is done in “searches”–were conducted over the same period, detecting undisclosed income of Rs 6,745 crore.

 

As many as 1,152 groups were searched by the income tax department in 2016-17, in which assets worth Rs 1,400 crore were seized, up 96% from Rs 713 crore in 2015-16. Undisclosed income admitted in these searches was up 42% to Rs 15,660 crore in 2016-17, from Rs 11,066 crore in 2015-16.

 

 

Source: Lok Sabha 1,2

 

Between April and October 2017, about 275 groups were searched by the tax department, assets worth Rs 573 crore were seized and assessees revealed Rs 7,800 crore in unaccounted income. Undisclosed income of Rs 2,485 crore was identified through 3,188 surveys.

 

“There is no official assessment of the total value of black money as on date,” Shiv Pratap Shukla, minister of state for finance, told the Lok Sabha (lower house of Parliament) in this reply on December 22, 2017.

 

Post demonetisation, 37 cases were registered under Prevention of Money Laundering Act, 2002, leading to the attachment of properties worth Rs 144 crore, according to this reply to the Rajya Sabha on December 19, 2017. In one of the cases, still under investigation, funds worth Rs 100 crore was remitted outside India.

 

 

Source: Rajya Sabha

 

As many as 413 benami transactions have been identified till June 20, 2017 since November 1, 2016, when the amended Benami Transactions (Prohibition) Amended Act, 2016 came into effect, FactChecker reported on September 19, 2017.

 

The registrations of 224,733 shell companies have been cancelled as on November 30, 2017, according to this reply to the Lok Sabha on December 15, 2017.

 

To track black money stashed abroad, India signed an agreement with Switzerland that will allow automatic sharing of tax data from January 1, 2018, Mint reported on December 21, 2017.

 

GST unites India into a common market but impacts businesses

 

GST was launched on June 30, 2017, as a unified taxation system that would end multiple taxation across the states, and create a level playing field for businesses throughout the country.

 

About 9.9 million taxpayers have registered under GST till December 25, 2017, of which 1.6 million are composition dealers required to file returns every quarter, according to the central board of excise and customs.

 

About 5.3 million returns have been filed for November till December 25, 2017, with collection of Rs 80,808 crore, according to this release from the finance ministry on December 26, 2017.

 

Top Five States With Highest GST Tax Collections
State Central Goods and Services Tax Integrated Goods and Services Tax State Goods and Services Tax Cess (levied for right to education and others) Total
Maharashtra 13654 17183 18701 3702 53240
Karnataka 5197 8520 7736 3110 24563
Tamil Nadu 5739 7605 8739 2062 24145
Gujarat 5464 9020 7375 1150 23009
Haryana 2890 10878 4627 1449 19844
Collection through imports 90038 2604 92642
Grand Total 59,048 190,519 87,888 30,224 367,679

 

Source: Lok Sabha; Figures in Rs crore; Data upto November 30, 2017.

 

Maharashtra, home to India’s financial capital Mumbai, reported the most (14%)–Rs 53,240 crore–GST collection.

 

GST impacted textile traders, especially in Surat, that reduced the daily production from four crore metre of grey cloth to three crore metre, Indian Express reported on September 30, 2017.

 

 

“GST has a much better ability to track and prevent black money as compared to demonetisation,” Gita Gopinath, professor of international studies at Harvard University, told  Mint in an interview on December 22, 2017.

 

“Maybe if they had not done demonetisation, the government would have had more time at hand to iron out all the problems with GST implementation,” she added.

 

We welcome feedback. Please write to respond@indiaspend.org. We reserve the right to edit responses for language and grammar.

 

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