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Will Samvat 2074 be good, bad or ugly?

October 31, 2017 08:25 IST

If GDP growth in Q2FY18 remains below 7%, the outlook for Samvat 2074 would remain uncertain at best, says Nitin Desai.

Illustration: Dominic Xavier/Rediff.com

October 19 marked the end of Samvat 2073 and the beginning of Samvat 2074 in some parts of India.

The turn of the year is a time when one takes stock of the past and assesses what lies ahead.

 

On Diwali, many businessmen closed their accounts for the previous year and did a chopda pujan to open the books for the new year.

One wonders what went through the minds of those who performed this Diwali ritual and prayed to Laxmi for prosperity.

The year that has passed began with a bombshell for the businessmen about nine days after they had celebrated Diwali. This, of course, was the demonetisation exercise.

Some eight months later, another jolt came in the form of a radical change in the indirect tax regime, with the implementation of the Goods and Services Tax (GST).

Could the government have designed these measures differently to reduce the shock and disruption that these businessmen experienced in Samvat 2073?

Take demonetisation, for instance. The need to eliminate high-denomination notes from circulation has been widely recognised.

Peter Sands, who used to head the Standard Chartered Bank, wrote a paper for the Harvard Kennedy School arguing for coordinated action by the G7/G20 countries arguing that this “would make life harder for those pursuing tax evasion, financial crime, terrorist finance and corruption.

"Without being able to use high denomination notes, those engaged in illicit activities... would face higher costs and greater risks of detection. Eliminating high denomination notes would disrupt their ‘business models’”. (Peter Sands, Making it harder for the bad guys: The case for eliminating high denomination notes, M-RCBG Associate Working Paper No.52, Harvard Kennedy School, February 2016)

The primary purpose of the November 8 demonetisation was to disrupt the black economy by depriving it of the high-value notes required for the cash transactions that oil its wheels.

This did not require an overnight demonetisation of Rs 500 and Rs 1,000 notes and certainly not the issuance of an even higher denomination Rs 2,000 note.

It could have been done by simply withdrawing these notes from circulation whenever they came into the banking system and demonetising them at a later stage when the amount in circulation was way below the 86 per cent of currency in circulation level that prevailed in November 2016.

The European Central Bank’s announcement in May 2016 about their intention to eliminate the euro 500 note was basically on these lines.

Other goals like promoting digital payments and broadening the tax net, that were added later in defence of the move, could have been pursued more efficiently and with much less disruption by other means.

The implementation of the GST in July 2017 was rather different. It had been in the works for a long time and was generally welcomed by businessmen and economic commentators.

Unfortunately the government tried to do too many things too soon.

A very sophisticated tax system was imposed on a market system that was far from sophisticated.

Off the record transactions, fudged account books, widespread use of cash payments, and receipts is the norm rather than the exception in the informal sector.

The implementation of the GST in its full splendour could have been staggered over a couple of years.

This year the focus could have been on implementing a single tax system and check-post free movement of goods.

The registration requirements, filing of returns and assessments could have been like in the old VAT system for most businesses.

The electronic system and automatic matching of invoices could have been introduced on a staggered basis and extended gradually to all over two or three years.

This would, of course, leave scope for evasion and false claims. But the threat of exposure when the full system would be deployed would have been a restraint.

The need for simplifying the rate structure has been recognised; but the GST would have remained stuck in inter–state negotiations if we had waited to secure agreement on a simpler rate structure.

However, the high rates on many items have led to a sticker shock because the GST rate on the bill now includes both the excise (which earlier were included in the base price) and the sales tax.

The bigger problem with the high rates is going to be the greatly increased returns from what is politely called tax arbitrage.

In the past the gain from sales without a bill was just the sales tax amount. Now it will be much higher than that.

It is possible that the demonetisation and GST are being blamed for business woes that arise from other reasons such as slower demand growth, high real rates of interest, the impact on the real estate sector of the measures to clean up the widespread malpractices there, the souring of success stories such as telecom and infotech, and the competition from Chinese imports.

But in a difficult business environment, moderating the disruptions of the demonetisation and the GST would have helped.

What is the mood in business circles now? According to a survey put out recently by the Reserve Bank of India, the index of  business  expectations  has come down from 105.4 in Q1 to 103.6 in Q2  of 2017-18.

Consumer confidence index is also down from 96.8 to 95.5 over these two quarters and inflation expectations have gone up.

Order book growth is lower than in the previous quarter but significantly higher than a year ago. So what lies ahead?

“The only function of economic forecasting is to make astrology look respectable,” said John Kenneth Galbraith.

Thus in an astrological mood one can say: “Watch out for the end of November when the CSO’s estimate of the GDP growth rate for the July–September 2017 quarter will become available.

"If this growth remains under 6 per cent then worry and worry hard; if it is between 6 per cent and 7 per cent, the prospects are uncertain;  and if it is more than 7 per cent, then relax as we are on the road to recovery.”

So here’s wishing everyone a more predictable Samvat 2074 with no more policy thunderbolts!

Nitin Desai
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