India's Demonetization Drive a Hit or a Miss? India's Economic Survey Outlines Picture
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Demonetization of INR 500 & 1000 notes came as a rude shock to India Inc & many other sectors that feared a slump in demand and economic growth.
In the last three month since the drive was announced, the Government of India has sent out signals of reassurance to the nation that the economy will be back on track once cash
However, the Economic Survey conducted annually before the Budget projects a different story.
According to the Ministry of Finance, note ban will shave off 25-50 bps from FY17 GDP growth and a much lower industrial growth is expected to be seen at 5.2% compared with 7.4% last year.
Based on projections, FY18 gross domestic product growth is seen in the range of 6.75-7.5% and demonetization risk to FY18 GDP looms.
Demonetisation may affect supplies of certain agricultural products like sugar, milk, potatoes and onions and market interest rates are seen lower in FY18. Sharp rise in prices in FY18 may cap room for monetary easing.
The Chief Economic Advisor said to increase the benefit of demonetisation, the government should quickly remonetise, bring real estate under GST's ambit, reduce taxes and provide a stable tax regime.
Impact of Demonetization on Indian Economy & Way Forward:
Stock of black money fell as some holders came in the tax net.
The government expects formalization to reduce the flow of unaccounted income.
Digital transactions among new users increased sharply; existing users’ transactions increased in line with historical trend.
The government expects some return to cash as supply normalizes but the digital revolution to continue.
Income taxes rose because of increased disclosures. Payments to local bodies and discoms increased because demonetized notes remained legal tender for tax payments, clearance of arrears.
The government expects indirect and corporate taxes to decline, to the extent growth slows. Over the long run, taxes should increase as formalization expands and compliance improves.
Cash declined whereas bank deposits increased sharply. Interest rates on deposits, loans, government securities declined; implicit rate on cash increased.
The government expects cash to recover but settle at a lower level. Similarly, deposits are also expected to decline, and probably settle at a slightly higher level.
Decline in prices as wealth fell while cash shortages impeded transactions.
The government expects prices to fall further as investing undeclared income becomes more difficult. Tax component is also expected to rise if GST is imposed on realty.
Growth slowed as demonetization reduced demand, supply and increased uncertainty.
The government says this could be beneficial in the long run if formalization increases and corruption falls.
Uncertainty increased as firms and households were unsure of the economic impact and implications for demonetization.
The government expects credibility to be strengthened if demonetization is accompanied by complementary measures. Early and full remonetization is essential.