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Indian economy today, growth rates & GDP estimates

, August 31, 2017, 0 Comments

FPI-GPI-Growth-Indian Economy-MarketExpressThe Indian Economy is slowing down. Growth rates have come down drastically as the new GDP estimates show. The reason for this to happen was primarily two: – demonetization and introduction of GST. The informal sector of the economy was badly devastated by demonetization.

The shortage of cash played havoc with the small and medium enterprises constituting the Indian Economy. The agriculture sector was also not spared by this cash crunch. The net result was a slow-down in growth rate of the country’s economy.

The labour class was badly impacted by demonetization. Labourers who had migrated outside their state in search of employment had to return home due to loss of jobs. The period of unemployment for these labourers was so long that they could not survive on the meager savings they had accumulated over the years which they had to forego in the process.

The declared objective of demonetization was to eradicate black money, reduce terror funding and eliminate counterfeit currency .When the government found that these objectives were not likely to be fulfilled they shifted the goal posts. They declared that the real objective of demonetization was to digitize payments, make India a cashless economy and widen the tax base.

These newly assigned objectives were laudable in themselves. But demonetization was not the proper means of achieving these objectives. There was no need to make people all over the country stand in long queues in front of commercial banks to exchange their holdings of demonetized currency if these were the objectives to be fulfilled. It is reported that more than 100 people lost their lives standing in such queues during the period of demonetization.

Demonetization was an ill thought out remedy for solving the problem of black money. It was doomed for failure the day it was introduced and fail it did. This is what subsequent events have proved. The RBI has now released the information that almost 99 per cent of the demonetized cash deposited by the public in banks have now returned to the central bank. This means that the objective of the government to immobilize black money held by the public did not materialize. What seems to have happened is that the holders of black money got an opportunity to convert their black money into white as a result of demonetization.

The introduction of GST also led to a slowdown in the Indian Economy. This was because in the early days of GST the businesses that were not ready for GST implementation held back production and tried to meet their supply requirements from their stocks. The opposition parties had wisely advised the government to postpone introduction of GST until the business community was actually prepared for it. But such counsel was not acceptable to the government and they proceeded to introduce GST with a haste.

As in the case of demonetization the section of society most badly affected by GST implementation was also the informal sector and the medium and small enterprises.  The large businesses were very well prepared for the implementation of GST and they were also well equipped to weather the adverse impact of demonetization.

The rate of inflation has come down in recent months. But this is not an unmixed blessing. Low prices of agricultural commodities have an adverse impact on the farmers. While low prices are always in the interest of the consumers they may also be an indication of low aggregate demand in the economy. This can also lead to low growth rate and low levels of investment in the economy.

One of the newly declared objectives of demonetization is widening of the tax base. It has been pointed out that expansion of the tax base was taking place from the time of the UPA rule and the increase in tax revenue that has been realized this year  is not much different from what was realized during the period prior to demonetization.

Digitization of making payments is another objective that has now been appended to demonetization. True there was in increase in non-cash payments during the period of demonetization when cash was scarce. But as the monetary situation eased cash payments are returning back as if with a vengeance. Less use of cash in the economy certainly needs to be encouraged. But there was no need to introduce demonetization in order to promote digitized modes of making payments.

The Indian economy was on the verge of achieving high growth rates when demonetization was introduced. Now with the onset of demonetization the clock has been turned back and growth rates in the economy have received a set-back. The idea to demonetize was a major blunder committed by the present government and it led to a great deal of suffering in the form of loss of lives, jobs and so on. While the original objectives of demonetization were not fulfilled the newly added objectives could in any case have been achieved through means other than demonetization.