Survey bats for lower taxes post note ban
Informal sector's hardship won't be seen much in GDP.
Economic Survey 2016-17 on Tuesday called for a reduction in tax rates and stamp duties to minimise costs of demonetisation. The survey asked the government to ensure that follow-up to demonetisation does not lead to over-zealous tax administration.
It said that demonetisation will negatively impact GDP in 2016-17 by 0.25 per cent to 0.50 per cent at 6.5 per cent. The survey, however, projected a rebound in growth in 2017-18 at 6.75-7.5 per cent.
The Economic Survey hoped that the remonetisation exercise will eliminate cash squeeze by April 2017. “Nearly 90 percent of transactions demand can be met before the end of the year.”
It noted that the short-term costs of demonetisation have taken the form of inconvenience and hardship, especially those in the informal and cash-intensive sectors of the economy who have lost income and employment.
“These costs are transitory, and may be minimised in recorded GDP because the national income accounts estimate informal activity on the basis of formal sector indicators, which have not suffered to the same extent. But the costs have nonetheless been real and significant,” said the Economic Survey.
It said benefits of lower interest rates and dampened price pressure may have cushioned the short-term macroeconomic impact.
However, the survey said that as the economy is remonetised and conditions normalise, the uncertainty should dissipate and spending might well rebind toward the end of the fiscal year. “But this relatively benign outcome would materialise if, and only if, remonetisation is effected expeditiously and decisive policy actions are taken to clear away the uncertainty and dispel fears of overzealous tax administration. Only then could the effects of demonetisation prove non-permanent in nature,” said the Survey.
It said benefits to the economy due to demonetisation will be in the form of increased digitalisation, greater tax compliance, reduction in real estate prices, increase long-run tax revenue collections and GDP growth.