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GST, bank woes hit India's growth in 2017: UN report

Weak corporate and bank balance-sheets contributed to a sharp slowdown in investment

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The goods and services tax (GST) and the twin balance-sheet problem pushed India's growth rate down to 6.6% in 2017 from 7.1% in the previous year, a United Nations (UN) report said.

However, the country is expected to grow at 7.2% this year on the back of a gradual recovery, said the report by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).

Twin balance-sheet problem refers to the stress on balance-sheets of both lenders and corporate borrowers.

"Weak corporate and bank balance-sheets also contributed to a sharp slowdown in investment. Thus, simply lowering policy interest rates was not enough to revive investment in that country," said the report titled Economic and Social Survey and Asia and the Pacific 2018, released jointly with Indian Council for Research on International Economic Relations (ICRIER) .

However, India's GDP is estimated to grow at 7.2% in 2018 and 7.4% in 2019.

A gradual recovery is likely with private investment expected to revive as the corporate sector adjusts to GST, the report said. It, however, pointed out that if India does not effectively address the twin balance-sheet challenge, it will continue to face weak private investment and modest economic growth.

The government has taken steps to improve the bank and corporate balance-sheets. The new Bankruptcy Code has provided a resolution framework that will help the corporates to clean up their balance-sheets and reduce their debts. The government has also announced a large recapitalisation package, equivalent to about 1.2% of GDP, to strengthen the balance sheets of the public sector banks.

The share of non-performing loans in India has doubled and defaults on corporate bonds and syndicated loans have surged in recent years. By mid-2017, distressed bank loans reached a record high of Rs 9.5 lakh crore, though more recent revelations suggest that the actual figure may be higher.

Meanwhile, the country's tax laws are still perceived to be the second-most complex in the Asia-Pacific region after China, even though GST has reduced the complexity of India's taxation system, the report said.

Talking about the government challenges in financing development through the tax system, the report stressed on increasing the tax-to-GDP ratio in this sub-region. Recent studies suggest that developing countries in the Asia-Pacific region are realising only half to two-thirds of their tax potential.

Jaimini Bhagwati, RBI chair professor at ICRIER, said that India is nowhere near other countries in South Asia when it comes to tax revenues, forget developed countries. "India's direct taxes revenues are less than its indirect tax revenues. However, in developed countries, direct tax collections are more than the indirect tax collections."

"We need to widen and deepen our tax base to fund development," he said, adding that there is a lot of scopes to increase the tax base.

Strengthening tax revenues remains a high priority for several economies in the Asia-Pacific region, and this can be improved in several ways, according to the report. A one-point increase in a new tax administration index, presented in the report, is associated with a tax revenue increase of 0.15% of GDP.

It is estimated that if Asia-Pacific countries have the same tax administration efficiency than OECD countries, revenue impact could be as high as 8% of GDP in such countries as Myanmar or Tajikistan; and about 3-4% of GDP in larger countries, such as China, India or Indonesia.

Expanding the tax base by rationalising foreign direct investment (FDI) tax incentives, introducing a carbon tax, and prudently increasing sovereign borrowings from financial markets while preserving debt sustainability, are other examples of policies that can be implemented to enhance public revenues and facilitate fiscal space commensurate with the investments necessary to achieve the 2030 agenda.

PROBLEM AT HAND

  • Weak corporate and bank balance-sheets contributed to a sharp slowdown in investment
     
  • Simply lowering policy interest rates was not enough to revive investment in that country, it said
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