India should be able to return to its “normal” growth range by next year as the short-term fallout from a new goods and services tax plan and last November’s currency ban ebb, the country’s finance minister told CNBC.
The Indian economy grew at its slowest pace in three years between April and June at 5.7 percent. A Reuters poll conducted in October showed economists predict South Asia’s largest economy will grow by 6.7 percent in the fiscal year ending March 2018.
“I see the Indian economy picking up quite well,” Arun Jaitley told CNBC, adding that the negative impact on growth from demonetization and tax reforms appear to have bottomed out.
“All indications do indicate that we will certainly improve, and whatever is the “Indian normal,” other factors remaining the same, we should be able to grow between that 7-8 percent range,” he said.
Worst of demonetization is over
Last November, India unexpectedly announced all 500 and 1,000 rupee banknotes would be withdrawn from circulation, replaced by new 500 and 2,000 rupee denomination notes. The move caught most people off-guard and led to a massive shortage of cash around the country.
While Jaitley acknowledged that India’s decision to squeeze out a large portion of its high value currency temporarily affected growth, he said the worst of it was “long over.”
He also pointed to the benefits that came about as a result of India’s demonetization efforts. Jaitley said it allowed the government to put digitization of the economy — an important aim for Prime Minister Narendra Modi — as a center-stage issue and allow for more cashless transactions.
The move also opened new funding sources for the economy. “We’ve been able to increase the tax base as far as the Indian economy is concerned,” he said, adding that there have also been an increase in the number of deposits in banks.
“Today, the banks have more funds to lend even to the [small-and-medium businesses], providing we are able to recapitalize the banks,” Jaitley said.
That said, many economists and analysts have said the real impact of demonetization was felt in India’s large informal sector, where most transactions are done in cash.
When asked how the move affected the informal sector, Jaitley said there wasn’t a “lasting impact” since “remonetization took place within a matter of weeks.”
But experts have said that India’s quarterly statistics — including its gross domestic product figure — use data on organized sectors as a proxy of the country’s unorganized sectors, meaning the numbers may not accurately reflect the impact of demonetization.
Positives from the tax reform
The other main factor affecting India’s growth outlook was the goods and services tax — India’s most ambitious economic reform plan in 70 years. It was rolled out only on July 1, but according to Jaitley, manufacturing slowed down in the months leading up to it because “people were de-stocking.”
The new goods and services tax replaces a thicket of indirect central and state levies that critics argued had blunted economic competitiveness and hobbled efforts to lift more out of poverty. The reform introduced four main tax rate bands on goods and services: 5-, 12-, 18-, and 28 percent irrespective of the location of purchase.
Jaitley said that, in the first few months since the plan was rolled out, the tax receipts collected had been “fairly okay.” Big and medium-sized businesses have adjusted well, he added, but smaller businesses — typically more reliant on cash — will “obviously take some time.”
“Therefore, we are giving them time in terms of compliance burdens,” he said. “I do see people will take time in adjusting to the new setup, and therefore, we are moving slowly in implementing some of the eventual steps which are a part of the [goods and services tax] itself.”
He pointed to several positives that came about from the reform. “The decision-making process of the [goods and services tax] has matured itself. The Council is functioning very effectively. You have a common market which has been created. You have all the barriers which have been removed,” Jaitley said.
In order to get states to comply with the reforms, Jaitley said they were promised a 14 percent yearly increase in tax revenue for the first five years.
“I’m quite sure we’ll be able to maintain that,” he said.