It will increase revenues: Demonetisation gets thumbs up from World Bank

Illustration by Ajay Mohanty
Successful demonetisation will help in raising revenues on a sustained basis as more and more people will come under the tax net, says a World Bank report.
During 2016-17, India generated additional tax revenues as unreported cash identified both through the amnesty scheme and demonetisation were brought under the tax net.

Gross tax revenue, including states' share, surpassed budgeted target (of 10.8 per cent) at 11.3 per cent, which was mostly due to higher-than-expected excise collections on petroleum products.

Even though demonetisation had only a neutral effect on direct taxes, which fell within the budgeted target of 5.6 per cent of the gross domestic product (GDP), it said.

"Going forward revenues may increase permanently if demonetisation is successful in raising the amount of income reported to tax authorities," World Bank said in a chapter titled 'India's Great Currency Exchange' in its latest 'India Development Update'.

On November 8, the Indian government had pulled out old Rs 500 and Rs 1,000 currency notes from circulation with immediate effect, which accounted to almost 86 per cent of cash in circulation.

The World Bank report is of the view that demonetisation has the potential to accelerate the formalisation of the economy.

Informal economy accounted for over half of India's GDP as of 2008-09 and 82 per cent of non-agricultural employment.

"Demonetisation promotes a reallocation of resources from the informal to the formal economy ... Many firms that had been reluctant to formalise now adopted digital payments, moving a step closer to formalisation, thanks to the demonetisation exercise," it said further.

Formalisation is ultimately a positive transformation that can lead to greater efficiency, World Bank said, adding India's low aggregate productivity is in part due to the prevalence of a large number of informal unproductive firms.

Still India needs to bring in complementary measures for ease of doing business to ensure that the new equilibrium of higher formalisation prevails.

"The smooth transition of Goods and Services Tax (GST) will be another major complementary reform to promote formalisation, as firms have a strong incentive to register with GST to obtain input tax credits," it added.

2017 global growth forecast at 2.7%

World Bank on Sunday maintained its forecast for global growth in 2017 and 2018 unchanged at 2.7 per cent and 2.9 per cent, respectively, as manufacturing and trade are picking up and confidence is improving

"A bright spot in the outlook is a recovery in trade growth to 4 per cent (in 2017) after a post-financial crisis low of 2.5 per cent last year," Xinhua quoted the World Bank's Global Economic Prospects (GEP) report as saying.

The recovery in trade growth in 2017 is supported by stronger demand from major advanced economies, increased trade flows to and from China, and a diminished drag from weak demand from commodity exporters, said the World Bank.

Stronger trade also reflected the improved outlook for global growth. According to the forecast, advanced economies are expected to grow 1.9 per cent in 2017, accelerating from the 1.7 per cent growth in 2016, said the World Bank in its flagship Global Economic Prospects (GEP) report released on Sunday.

However, it expected the advanced economic growth to slow to 1.8 per cent in 2018 and 1.7 per cent in 2019, in line with its forecasts in January.

In emerging market and developing economies, growth is expected to accelerate to 4.1 per cent in 2017 from 3.5 per cent in 2016. The growth is projected to pick up pace in 2018 and 2019, and will reach 4.5 per cent and 4.7 per cent respectively.

"After a prolonged slowdown, the recent acceleration in activity in some of the largest emerging markets is a welcome development for growth in their regions and for the global economy," said Ayhan Kose, director for the GEP program at the World Bank.

Growth among the world's seven largest emerging market economies, namely China, Brazil, India, Indonesia, Mexico, Russia and Turkey, is expected to surpass its long-term average by 2018.

"Recovering activity in these economies should have significant positive effects for growth in other emerging and developing economies and globally," said the report.

World Bank expected Chinese economy to grow 6.5 per cent this year and 6.3 per cent in 2018 and 2019, in line with its forecast in January.

Fiscal support is expected to continue to offset monetary tightening, said the World Bank. It expected government policies will continue to support growth, contain financial risks, and encourage a rebalancing of the economy to more of a focus on consumption.

The US economy is projected to grow 2.1 per cent this year, 0.1 percentage point lower than the World Bank's forecast in January. However, it raised the forecast for US growth in 2018, up 0.1 percentage point to 2.2 per cent. The growth will again slow to 1.9 percent in 2019, as it moves closer to potential.

Tax cuts and infrastructure programs could lead to stronger-than-expected growth in the short term, but also to a more rapid increase in interest rates.

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