Improvement in tax-to-GDP ratio needs to stabilise

Exactly a year after Prime Minister Narendra Modi’s surgical strike on black money through the scrapping of high-value currency notes of Rs 500 and Rs 1,000, its economic gains are still elusive.  

On the other hand, the disruptive demonetization, which many economists see as a major structural reform, has shaken up the economy by pulling down GDP growth rate, fuelling unemployment as cash economy in the informal and rural economy gets hit, capital expenditure (capex) projects slows down and digitisation of payments relapses to cash after a brief spurt.

D K Srivastava, chief policy adviser at EY, told DNA Money that economic pains of note ban were par for the course but could have been minimised with detailed advance planning.   

“Economic costs had to be faced in the short run, maybe the first four quarters, in terms of both losses of GDP growth and employment. Some sectors proved to be especially vulnerable, particularly the informal sector and the rural economy. Some of these costs could have been minimised with detailed advance planning,” he said.

All said and done, EY’s Srivastava believes demonetization may prove to be “net positive” if the rise in “tax-GDP ratio proves to be tangible and permanent”.  

“The gains were anticipated to be long-term, particularly an increase in the tax-GDP ratio. Because of different time perspectives, a comparison between loss and gains is not possible. The exercise may prove to be net positive if the increase in the tax-GDP ratio proves to be tangible and permanent,” said the EY economist.

According to the latest Centre for Monitoring Indian Economy (CMIE) statistics, unemployment rate post demonetisation – November 2016 to August 2017 – has risen to 23.5% from the pre-demonetisation – January 2016 to October 2016 – level of 8.8%. A report on employment by Mahesh Vyas of CMIE claims: “Demonetisation is an unnecessary and costly price we pay if we do not transform and resolutely reject tax evasion in society”.    

Vyas said the “heavy price paid by the poor and unfortunate who lost jobs” due to note ban would go waste if it was not offset by “transformation in attitudes towards the generation and deployment of unaccounted wealth”.

CMIE figures show that urban unemployment remained high at 7.5% during the week ended October 15. This was lower than the recent peak of 8.2% in the week before that but the average urban unemployment rate of 7.85% during the first fortnight of October was significantly higher than the levels seen during the preceding 12 months.

The economic research firm stated the overall unemployment rate during this period was around the same level as in the previous week at 5.7-5.8%.

Curiously, even the capex project completion in the current fiscal seems decelerating. The CMIE number showed that it had fallen from Rs 1.91 lakh crore in the fourth quarter of the last fiscal to Rs 1.14 lakh crore in June quarter and further slipped to Rs 80,000 crore in the second quarter of fiscal 2018.

“The first half of 2017-18 indicates that we may be losing the momentum. The total investments commissioned during the first half adds up to a mere Rs 1.6 lakh crore or, even after revisions, it may barely touch Rs 2 lakh crore. A simple projection, and even after accounting for a pick-up in the second half, indicates that 2017-18 project completions would fall short of the order of Rs 6 lakh crore completions that we saw in the past two years,” said CMIE’s Vyas in another report authored by him.

According to him, promoters did not seem to be in “sufficient hurry to complete the on-going projects”.  

“Some promoters keep pushing the date of completion further into the future. Others don’t even do that,” he wrote in his report.

Vyas believes that projected capex project commissioning for current fiscal “would be the lowest commissioning of projects during the Modi government’s tenure so far”.

These disappointing numbers are getting reflected in the national income growth, which tumbled to below 6% in June quarter.

GDP growth rate was on the downslide even before demonetization but the note ban has accentuated the plunge post it.

The goals of demonetization included a reduction in black money and counterfeit notes and promotion of digitisation of payments and cashless economy. On these fronts too, the government has not been able to go much far.  

While the tax department and finance ministry officials seem to be in hot pursuit of black money, the recent leak of Paradise Papers raises several questions on the government’s efforts.

FUTURE PERFECT

• DeMo may be net positive if the increase in the tax-GDP ratio is tangible and permanent
   
• Economic pain could have been minimised with planning, EY said