Economy disrupted by lingering impact of demonetisation, GST roll-out

Call it disruption or structural reform, demonetisation (or note ban) did have dampening effects on the economy. However, even as its negative impact was fading by the time 2017-18 began, the announcement of another reforms or “disruption” — the goods and services tax (GST), which was to be implemented by July 1, 2017, shock the economy and businesses. 

The result of these two reforms was evident as the gross domestic product (GDP) growth came crashing down to a three-year low of 5.7 per cent in the first quarter of 2017-18. It was largely because of pre-GST jitters and lingering effects of demonetisation. 

The economy did recover thereafter to 6.5 per cent in the second quarter and to 7.2 per cent in the third quarter. Overall, the economy is now projected to grow 6.6 per cent in 2017-18 by the second advance estimates, a bit higher than 6.5 per cent, pegged by the first advance estimates. 

Both the World Bank and the International Monetary Fund had projected India’s economy to grow a tad higher at 6.7 per cent for 2017-18. So, the growth for 2017-18 should to be around the figure projected by second advance estimates, depending on the fourth quarter GDP numbers. 

However, the moot point is that economic growth saw disruptions due to demonetisation and implementation of the GST. While the impact of demonetisation has faded, experts believe that some of the GST effects are still lingering such as on exporters who have been struggling to get refunds. Merchandise exports did not contract in any month of 2017-18, except for October. However, the growth has been coming down since its strong surge of 30.55 per cent in November 2017 and stood at just 4.4 per cent in February, due to the issue of refunds. 

“In many ways, 2017-18 was a defining year for the Indian economy. India completely reset its indirect tax system to a comprehensive GST while still experiencing the impact of the demonetisation shock of November 2016,” says Anis Chakravarty, partner and lead economist, Deloitte India. 

He says that the rise in GDP growth from the second quarter of 2017-18 suggests that the initial negative impact of the GST and demonetisation may be waning. 

UPA v/s NDA: Qualitative difference

However, if one goes into comparison between where UPA had left the economic growth and the NDA’s performance, it does seem that GDP expansion in 2017-18 is officially estimated to be just 0.2 percentage point higher than 6.4 per cent handed down by the Manmohan Singh government in 2013-14, a period ridiculed for its so-called “policy paralysis”.

In between, the NDA did push the growth upwards to 7.4 per cent in 2014-15 and then to 8.2 per cent in 2015-16. 

Bibek Debroy, chairman of the economic advisory council to the Prime Minister, however, feels that growth achieved by the UPA was due to fiscal profligacy.

“The question is not what growth rate has been delivered, but about fiscal consequences of that growth. The question about the UPA growth was not about the growth figure, but about the way that growth happened,” says Debroy. 

Bibek Debroy
So far, as fiscal deficit is concerned, the NDA paused on fiscal deficit target thrice. The Budget Estimates of reining in fiscal deficit at 3.2 per cent of GDP was revised upwards to 3.5 per cent for 2017-18. Even the revised target seems difficult to achieve unless expenditure was squeezed. The fiscal deficit figure for the April to February period 2017-18 (11 months) was 20.3 per cent higher than revised estimate for the entire fiscal year.

The parameter on which the NDA government succeeded remarkably is inflation. This may also be due to Monetary Policy Committee, which has been given the mandate to contain consumer price index-based inflation between 2 per cent and 6 per cent. If the average inflation breaches this range in any three consecutive quarters, the Reserve Bank of India (RBI) will have to explain the reasons to the government. 

Inflation never breached this range in 2017-18, except for the month of June. That time, inflation was outside the lower range and stood at 1.46 per cent, initially leading to worries over low inflation. 
Exact contrast to this, inflation exceeded 4 per cent for the fourth month in a row till February. However, inflation has been coming down from the high of 5.21 per cent in November and stood at 4.44 per cent in February.

Risks aplenty

Major risks to the economy may come from oil prices and growing tendency of protectionism around the world, triggered by US’s so-called reciprocal taxes. However, domestic factors, including from adjustments to the GST, would play a greater role. “Major external risks include oil price shocks, tax rate competitiveness, and growing barriers to trade. However, the Indian economy remains predominantly a domestically-driven one, so the major downside risks will be domestic in nature, such as continuing disruptions from the implementation of the GST,” Chakravarty says.



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