By Elton Gomes
The World Bank has stated that the Indian economy is projected to grow by 7.3% in 2018 and 7.5% in 2019 as it has recovered from the impact of demonetisation and rollout of the Goods and Services Tax (GST).
The organization’s bi-annual South Asia Economic Focus report released on Sunday further added that India’s recovery will help uplift South Asia as a region, making it the fastest-growing region in the world.
“Both demonetisation and GST created short-term disruptions in economic activity,” the report said. “As the inflation rate rebounded pushing real interest rates down, a recapitalization plan for banks was announced, and the effects of the two temporary shocks vanished, and growth bounced back.”
However, despite growth and a seemingly favourable economy, job creation remained a concern for India. The report mentioned that to maintain its employment rate, India has to create 8.1 million jobs in a year. The employment rate in India has been declining largely due to women leaving the job market, the report added.
Here’s what happened
Demonetisation and GST announced
In an attempt to keep a check on black money, on October 8, 2016, Prime Minister Narendra Modi announced that Rs 500 and Rs 1000 notes will not be considered as legal tender. The move was supposed to be a major attack on the problem of corruption and black money which plagues the country.
In 2017, on the intervening night of June 30 and July 1, Union Finance Minister Arun Jaitley announced that India will witness its biggest tax reform as he rolled out the GST bill in the parliament.
Jaitley said that GST “over the medium to long term will lead to a rise in revenues of the Centre and states as the size of the formal economy will grow.” He added that the tax reform was a more efficient system that will result in better tax compliance, as per media reports.
Aftermath of the announcements
Although both economic reforms were seemingly implemented to combat black money and tax evasion, they made life difficult for the Indian citizens.
The Indian Express reportedly said that deaths of 33 people could be “directly or indirectly linked” to demonetisation. The deaths could be a result of exhaustion after several people had to stand in long lines to exchange notes.
Long queues outside banks and ATMs became a normal sight, with people waiting for hours to have their currency exchanged.
Due to the ongoing effects of demonetisation and the adverse impact of GST, the economic growth in 2017-18 was estimated to slow to a four-year low of 6.5%, against 7.1% in 2016-17.
Furthermore, in March 2018, the Centre sought the parliament’s approval to attain an extra spending of Rs 85,315 crore. Out of this, a large chunk was used to compensate states for revenue losses incurred due to the implementation of the GST. Furthermore, research conducted by the All India Manufacturers’ Organisation in 2017 showcased that 45% of people in trading organizations lost their jobs during the first few months of demonisation. Additionally, 35% of people in medium and small enterprises lost their jobs and 15% of workers in large companies also lost their jobs during the same period (October-December 2016). Unemployment figures continued to be concerning later in 2017 as well.
Why you should care
After the initial hiccups in the economy due to demonetisation and implementation of the GST, India has finally begun to recuperate.
Moody’s Investors Service, a financial analytics company in its global growth forecast for 2018 and 2019 released last month said there are signs that the Indian economy has started to recover from “the soft growth patch attributed to the negative impact of the demonetisation undertaken in 2016 and disruption related to last year’s rollout of the Goods and Service Tax (GST).”
Although several market experts suggested that economic reforms like demonetisation and the GST were badly implemented, however, it seems like their ill-effects have finally waived off. After five sluggish quarters, the Indian economy was seemingly active in 2017.
Demonetisation led to a significant amount of people depositing their money in the bank. Coupled with the introduction of the e-way bill designed to curb tax evasion and efficient tax reforms, India might just grow at a better rate than predicted. However, the government faces the great challenge of combating the problem of unemployment.
The report revealed that high rates of growth will not be enough to increase employment rates in the country. “If South Asian countries are serious about increasing employment rates, more jobs will need to be created for every percentage point of growth,” said the report.
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