Here’s Why the RBI Cut India’s 2018 Growth Rate to 7.8 Percent

Demonetisation’s failure, and the hurried implementation of GST could indicate why the RBI cut growth to 7.8 percent

Why did the Reserve Bank cut the growth rate estimate for 2018 to 7.8 percent?

(Photo: The Quint)

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 percent of India’s currency by value, India’s real growth rate for 2017-18 is 6.7 percent, down from 7.3 percent 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. The implementation of the GST so far also appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term.

RBI <a href="http://eaindustry.nic.in/key_economic_indicators/Key_Economic_Indicators.pdf">report</a>, October 2017

The monsoon harvest of 2017 was 135 million tonnes, up 23 percent, 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 percent and 7 percent, respectively, citing the aftermath of demonetisation and the introduction of GST.

The impact of demonetisation – the withdrawal of 86 percent 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.

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 8 November 2016.

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

This indicates that only 1 percent 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 nine percent of loans were repaid in 2017 compared to 70 percent in 2016, cash reserves were down and bad debts up, IndiaSpend reported on 11 November 2017.

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

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

Crackdown on Black Money Continues

The income tax department seized assets worth Rs 900 crore and an 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 on 19 December 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 percent from Rs 713 crore in 2015-16.

Undisclosed income admitted in these searches was up 42 percent to Rs 15,660 crore in 2016-17, from Rs 11,066 crore in 2015-16.

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 in this reply on 22 December 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 19 December 2017. In one of the cases, still under investigation, funds worth Rs 100 crore was remitted outside India.

Data compiled by IndiaSpend from the Rajya Sabha shows 37 cases registered under POMLA post demonetisation.(Photo Courtesy: IndiaSpend)

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

The registrations of 2,24,733 shell companies have been cancelled as on 30 November 2017, according to this reply to the Lok Sabha on 15 December 2017.

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

GST Unites India Into a Common Market, but Impacts Businesses

GST was launched on 30 June 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 25 December 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 25 December 2017, with collection of Rs 80,808 crore, according to this release from the finance ministry on 26 December 2017.

Data compiled by IndiaSpend from replies to Lok Sabha questions.(Photo Courtesy: IndiaSpend)

Maharashtra, home to India’s financial capital Mumbai, reported the most (14 percent) – 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 30 September 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 22 December 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.

(This article has been republished in an arrangement with IndiaSpend)