India has become the world’s sixth-biggest economy, pushing France into seventh place, according to updated World Bank figures for 2017. India’s gross domestic product (GDP) amounted to $2.597 trillion at the end of last year, against $2.582 trillion for France. India’s economy rebounded strongly from July 2017, after several quarters of slowdown blamed on economic policies pursued by Prime Minister Narendra Modi’s government.
India, with around 1.34 billion inhabitants, is poised to become the world’s most populous nation, whereas the French population stands at 67 million. This means that India’s per capita GDP continues to amount to just a fraction of that of France which is still roughly 20 times higher, according to World Bank figures.
Manufacturing and consumer spending were the main drivers of the Indian economy last year, after a slowdown blamed on the demonetisation of large banknotes that Modi imposed at the end of 2016, as well as a chaotic implementation of a new harmonised goods and service tax regime.
India has doubled its GDP within a decade and is expected to power ahead as a key economic engine in Asia, even as China slows down.
According to the International Monetary Fund, India is projected to generate growth of 7.4% this year and 7.8% in 2019, boosted by household spending and a tax reform. This compares to the world’s expected average growth of 3.9%.
The London-based Centre for Economics and Business Research, a consultancy, said at the end of last year that India would overtake both Britain and France this year in terms of GDP, and had a good chance to become the world’s third-biggest economy by 2032.
At the end of 2017, Britain was still the world’s fifth-biggest economy with a GDP of $2.622 trillion. The US is the world’s top economy, followed by China, Japan and Germany.
The World Bank today projected India’s GDP growth at 7.3 per cent for the next financial year and accelerate further to 7.5 per cent in 2019-20.
The World Bank’s biannual publication, India Development Update: India’s Growth Story, expects the economy to clock a growth rate of 6.7 per cent in the current fiscal ending March 31.
The report, however, observed that a growth of over 8 per cent will require “continued reform and a widening of their scope” aimed at resolving issues related to credit and investment, and enhancing competitiveness of exports.
“The Indian economy is likely to recover from the impact of demonetisation and the GST, and growth should revert slowly to a level consistent with its proximate factors — that is, to about 7.5 per cent a year,” the report said.
In November 2016, the government had scrapped high value currency notes of Rs 500 and Rs 1,000 in a bid to check black money, among others.
Later, India implemented its biggest indirect tax reform — Goods and Services Tax (GST).
Both of these initiatives had impacted the economic activities in the country in short run.
India’s economic growth had slipped to a three year low of 5.7 per cent in April-June quarter of the current fiscal, though it recovered in the subsequent quarters.
The economy is expected to grow at 6.6 per cent in the current fiscal ending March 31, as per the second advanced estimates of the Central Statistics Office (CSO), compared to 7.1 per cent in 2016-17. The earlier estimate was 6.5 per cent.
The Economic Survey tabled in Parliament has projected a growth rate of 7 to 7.5 per cent in the 2018-19 financial year.
The World Bank report further said that accelerating the growth rate will also require continued integration into global economy.
It pitches for making growth more inclusive and enhancing the effectiveness of the Indian public sector.
IMF has underscored the significance of reforms in other key sectors like education, health and improving the efficiency of the banking and financial systems.
The Indian economy now seems to be on its way to recovering from disruptions caused by demonetisation and roll-out of goods and services tax, the IMF said today. At the same time, the IMF has underscored the significance of reforms in other key sectors like education, health and improving the efficiency of the banking and financial systems.
India’s economy has expanded strongly in recent years, thanks to macroeconomic policies that emphasise stability and efforts to tackle supply-side bottlenecks and structural reforms. Disruptions from demonetisation and the rollout of the goods and services tax (GST) did slow growth,” Tao Zhang, Deputy Managing Director of IMF, told PTI in an interview.
“However, with the economy expanding by 7.2 per cent in the latest quarter, India has regained the title of the fastest-growing major economy, Zhang said.
Calling this development a “welcome change”, Zhang said the growth prospects remain positive.
“That said, the Indian economy would benefit from further reforms, such as enhancing health and education, encouraging private and public investment, and improving the efficiency of the banking and financial system. This would support durable and inclusive growth and enable India to move toward the income levels of wealthier countries, the top IMF official said ahead of his visit to India.
Given the dominance of cash in everyday transactions in the Indian economy it was inevitable that demonetization would temporarily affect economic activity, said Zhang who is travelling to India and Bhutan from March 12 until March 20.
The rollout of the GST last year was a landmark accomplishment that can be expected to enhance the efficiency of intra-Indian movement of goods and services, create a common national market, enhance tax buoyancy, and boost GDP growth and job creation, he said.
Yet the complexities and glitches in GST implementation also resulted in short-term disruptions. As I mentioned earlier, the economy now seems to be on its way to recovering from those disruptions, Zhang said in response to a question.
When asked about the latest Indian budget, which many critics say is protectionist in nature, Zhang said IMF research indicates that tariffs are broadly contractionary, reducing output, investment, and employment.
Trade tariffs may give limited relief to industries and workers that directly compete with affected imports. However, they can raise costs to consumers and other businesses that use the protected products. Tariffs also would reduce incentives for businesses to compete and improve efficiency, he cautioned.
Since the opening of the economy starting in the early-1990s, India has benefitted from trade liberalization, he observed.
Further supply-side reforms aimed at improving the business climate could enhance these benefits, the top IMF official asserted.
Noting that the IMF and India have close relations, and the two have always been good partners, Zhang said his visit is a reflection of this partnership, as is the newest regional capacity development center, SARTTAC, based in New Delhi.
The center partners with India and its South Asian neighbors to build strong institutions and implement policies that promote growth and poverty reduction in the region, he said.
My visit is an opportunity to exchange views with the Indian authorities, senior RBI officials, and representatives from the Indian business community, civil society, and others, he said.
Zhang will also have a presentation on financial technology that will take place on Monday at the National Stock Exchange of India.
We will go over the latest trends in financial technology and their effects on the global economy and India, said the top IMF official.
Qatar’s economy has proven its resilience and continues to perform well amid the blockade, improving local liquidity and gaining the confidence of international investors, said Doha Bank CEO Dr R Seetharaman.
“The blockade (on Qatar by a quartet of nations) came as a rude shock to us. But Qatar has withstood… it has proven to be a resilient model. Qatar’s economy was performing around 2.5% last year.
This year we are not expecting less than 3.1% growth,” Seetharaman told Gulf Times in an interview.
He said Qatar improved local liquidity by disinvestment last year.
“If you look at Qatar economy, liquidity was under stress to start with. The government improved local liquidity. Now international investors have reposed confidence in Qatar. The banking system as a whole is improving.
“The loan to deposit ratio in the Qatari banking system has significantly improved and now stands at 112%. This is an improvement of the level, immediately post blockade, which was at 116%.”
Qatar’s banking sector had witnessed credit expansion of around 9%, the deposit book has grown of more than 10.4%, he noted.
He said in the days that followed the blockade, there were challenges in terms of international investors slowing down on Qatar.
“They were concerned about the Qatar economic momentum. Even the rating agencies looked sceptical, which explains the negative outlook on the sovereign.”
But, Seetharaman said, Qatar’s ‘AA’ rating, which is still very high, has not been challenged although the international rating agencies have changed the sovereign outlook to negative. The high rating (A) of Qatar’s banks is also not challenged.
Currently, Qatar holds Aa- by Fitch, AA- by S&P and Aa3 by Moody’s.
“With strong exports, positive economic outlook, and natural gas markets unaffected by the economic blockade, the overall growth for Qatar remains sustainable,” Seetharaman noted.
The International Monetary Fund (IMF) in its latest World Economic Outlook revised up its forecast for world economic growth in 2018 and 2019, saying sweeping US tax cuts were likely to boost investment in the world’s largest economy and help its main trading partners.
Seetharaman also said new global forecast has a 3.9% growth this year and next. The advanced economies are expected to grow by 2.3% in 2018 and 2.2% in 2019.
The emerging and developing economies are expected to grow by 4.9% in 2018 and 5% in 2019.
India is projected to grow at 7.4% of its gross domestic product (GDP) in 2018 making it the fastest growing economy among emerging economies following last year’s slowdown due to demonetisation and the implementation of goods and services tax.
China, which is spearheading the ‘Belt and Road’ concept is expected to grow up to 6.6% this year, he added.
The income-tax department will in all likelihood go into overdrive in the next three months with the Central Board of Direct Taxes — the apex body — alerting all senior tax officials that their performance is being “monitored at the highest level.” It will also give a renewed push towards imposing and recovering tax on Rs 3 lakh crore deposit, which is suspected to be the quantum of unexplained cash parked with banks post demonetisation.
“There will be searches, surveys, information verification, and follow-ups. Explanations on ‘cash in hand’ amounts are being sought from different kinds of assessees, and not just from large establishments and jewellers… We will be knocking on many doors even if our respective targets are met,” a senior tax officer told ET.
This was broadly the message conveyed by the CBDT chief during a recent video-conference with tax officials.According to another person in the department, direct tax offices in various circles may be required to go full steam due to a drop in GST collection following cut in tax rates and refunds.
‘Dispose of Appeals Before March 31’
Till now many in the department were caught up with assessments pertaining to notices which were sent in September 2015 (for the financial year 2014-15) as these matters were getting time-barred in December 2017. Now, tax officers have the time to focus on recovery till March 31. “A possible slowdown in income tax refund, directing the CIT Appeal to dispose of appeals confirming the additions, investigating cases where assesses have deposited more than Rs 10 lakh in demonetised notes may push up gross collection. But does this really reflect the true state of tax collection in a slowing economy where the GDP growth rate is admitted to have come down,” said senior chartered accountant Dilip Lakhani.
In some of the large tax collection zones like Mumbai, the chief commissioner has written to several offices of the commissioner of income tax (Appeals), which is the first appellate authority, to dispose of many appeals before the close of the financial year.
Tax authorities technically have the power to come down heavily on those who are unable to explain their cash deposit by slapping 60% tax and penalty – even though the process could take some time.
About two months ago, tax offices were directed to accept only those revised tax returns where there is a “bonafide inadvertent error” or “a mistake” on the part of the assessee. This was to tax the unaccounted cash that was deposited after demonetisation (of high denomination currency bills in November 2016) and subsequently regularised through a revised return and payment of tax on it at the normal rate of 30%.
However, the communique to tax officers guidelines were only suggestive in nature as the law allows filing of revised return due to various reasons including an intention to conceal income.
The goods and services tax (GST) might find use in national accounts beyond the routine application of indirect taxes in converting gross value added (GVA) into gross domestic product (GDP).
“We have started an exercise to look into this. A group comprising officials of the national accounts division is examining this issue,” TC A Anant, the government’s chief statistician, told Business Standard.
The GST, he noted, was more than a tax, since assessees file returns and describe activities on which the tax is levied, besides a whole bunch of other information. “In B2B (business-to-business) transactions, we can track the value chain. The national accounts committee is looking at it. It is at least worth probing,” Anant said. The group will check if there are legal or technical hurdles in the way. In the old taxation system as well, such filings were done in the case of value-added tax, central excise duty and service tax, but those were in separate databases. So, the system’s ability to use the data was somewhat limited.
“We had in the past conducted discussions to see if we could get more mileage from these databases. However, these remained at discussion level and not converted into outcomes,” Anant said.
There were many reasons for this. First, the process of computerisation of tax filings started around 2005-06, the service tax bit earlier and central excise a bit later. It got standardised around 2010-11.
“We started looking at it when we were doing preparatory work for base revision. Partly because of that fragmented nature, we were unable to get any mileage from it. By 2015, it became clearer that these indirect taxes would be taken over by the GST. Now, we have greater advantage as the GST covers both goods and services.”
So far as the usual use of the GST for converting GVA into GDP is concerned, Anant said it was simply a question of getting the data on the GST collection and verify how much of it is attributable to the Centre and how much to state collection. With the latter, there will be an additional bit of information, on how much was collected by specific states and the share they got from the Centre.
“This you may call a routine part of the GST database. For us, numbers are important because we use these — overall tax collections in national accounts and, similarly, specific state figures for its GSDP,” he said. Much of indirect taxes, net of subsidies, are used for converting GVA into GDP, both at current prices and at constant prices. Earlier, a panel headed by former NITI Aayog vice-chairman Arvind Panagariya had suggested using the data on the GST Network (GSTN), the levy’s information technology backbone, to assess the job market. It recommended using registration and enrolment on the GSTN as a sample for enterprise survey, to be conducted annually. So far, a little over nine million assessees have registered on the GSTN. High-frequency data, monthly or quarterly, might be conducted on the subset of the GSTN. The panel also suggested making the GSTN the universal establishment number and the income taxbased permanent account number embedded with the GSTN the universal enterprise number.
“IN B2B TRANSACTIONS, WE CAN TRACK THE VALUE CHAIN. THE NATIONAL ACCOUNTS COMMITTEE IS LOOKING AT IT. IT IS AT LEAST WORTH PROBING” TC A Anant Chief statistician
As India’s foreign-exchange reserves march toward the unprecedented $400 billion mark, its central bank faces a costly conundrum. To keep the rupee stable and exports competitive, it is having to mop up inflows that’s adding cash to the local banking system. Problem is, banks are flush with money following Prime Minister Narendra Modi’s demonetization program last year, leaving them already struggling to pay interest on the deposits in an environment where loans aren’t picking up. The resulting need to absorb both dollar- and rupee-liquidity is stretching the Reserve Bank of India’s range of tools and complicating policy. Costs to mop up these inflows have eroded the RBI’s earnings, halving its annual dividend to the government. “The RBI would be paying more on its sterilization bills than it gets on its reserve assets, so it would cut into its profits,” said Brad W. Setser, senior fellow at New York-based thinktank Council on Foreign Relations. “Selling sterilization paper in a country with a relatively high nominal interest rate like India is costly.”
Governor Urjit Patel aims to revert to neutral liquidity in the coming months from the current surplus. Lenders parked an average 2.9 trillion rupees ($45 billion) of excess cash with the central bank each day this month compared with 259 billion rupees the same time last year. This peaked at 5.5 trillion in March. The surge in liquidity has pushed the RBI to resume open-market bond sales as well as auctions of longer duration repos besides imposing costs on the government for special instruments such as cash management bills and market stabilization scheme bonds. Meanwhile foreign investors have poured $18.5 billion into Indian equities and bonds in the year through June, during which period the RBI has added $23.4 billion to its reserves. Its forward dollar book has also increased to a net long position of $17.1 billion end-June from a net short $7.4 billion a year ago. “My guess is reserves over 20 percent of GDP would start to raise questions about cost – but that is just a guess,” said Setser. India’s reserves have ranged between 15 and 20 percent of GDP since 2008 global crisis — a level that’s neither too low to create vulnerability or too high indicating excess intervention, he said.
Consistent buildup in the forward book may have cost the RBI some 70 billion rupees, while total liquidity-absorption costs due to the demonetization deluge from November to June were 100 billion rupees, according to calculations by Kotak Mahindra Bank Ltd. The RBI paid another 50 billion rupees to 70 billion rupees to print banknotes, the bank estimates. A weakening dollar would also have led to losses due to the foreign-currency cash pile, which has traditionally been dominated by the greenback. The Bloomberg Dollar Index has fallen 8.5 percent this year. After all these expenses, the RBI transferred 306.6 billion rupees as annual dividend to the government, compared with 749 billion rupees budgeted to come from the RBI and financial institutions. More clarity will emerge with the RBI’s annual report typically published in the final week of August. “This disturbs the fiscal math for the year through March 2018,” said Madhavi Arora, an economist at Kotak Mahindra Bank. Assuming everything else stays constant, she estimates the budget deficit may come in at 3.4 percent of gross domestic product rather than the government’s goal of 3.2 percent.
Apart from the high costs, there’s another dimension to the surge in liquidity. The RBI could face a shortage of bonds it places as collateral with its creditors. It is said to be preparing a fresh proposal to the government for creation of a window — the so-called standing deposit facility — which doesn’t require any collateral. “As the excess liquidity challenge looks set to persist, the RBI will need more tools to manage this, such as the standing deposit facility,” economists at Morgan Stanley, including Derrick Kam, wrote in an Aug. 16 note. He predicts that at the current rate of accretion, foreign-exchange reserves will hit $400 billion by Sept. 8 from $393 billion this month.