Note ban takes its toll on economy

In November last year, calamity struck India in the shape of demonetisation — about which Union finance minister Arun Jaitley was not in the loop — and the result is evident from the Economic Survey for 2016-17 presented to Parliament on Tuesday.

The news is not good, but there are pie-in-the-sky promises aplenty for 2017-18 (like jump in growth rate), based on hot air mostly.

The data in the survey, which lays out the economic landscape of the land a day prior to the presentation of the Union Budget, suggests that the economic mandarins were promising a false dawn.

As recently as early January, the advance estimate set out by the Central Statistics Organisation led us to believe that the rate of economic growth would be 7.1 per cent for the financial year. The RBI was on the same wavelength. Alas, it has turned out to be 6.5 per cent. This is one per cent less than the 7.6 per cent being projected at the commencement of the year.

That means a contraction of approximately Rs 1,50,000 crores on account of curtailment of economic activity due to demonetisation. The survey speaks of a sense of uncertainty and anxiety in the economy, and a lack of job growth. The much-touted idea of a universal basic income (UBI) is “not ripe for implementation”.

Tax collection was buoyant till November last, and then slipped (because of slowing down of economic activity). Gross fixed capital formation (fixed investment) in the system as a proportion of GDP fell from 29.3 per cent to 26.6 per cent. Credit offtake for industry was below one per cent.

There was moderation in exports. Still, the current account deficit has come down to 0.3 per cent. This magic is the result of reduced petroleum prices and FDI inflow in the first two quarters. “Serious risk” for exports is being envisaged in the medium term on account of protectionism. Petroleum prices are also much higher now than last year. That cannot improve the outlook.

According to the survey, the fiscal gain from GST, expected to kick in around September, will “take time to realise”. In the foreseeable future, demonetisation will affect the supply of sugar, milk, potatoes and onions. We can then deduce that the prices of these commodities will go up.

The survey prescribes a cut in individual income-tax rates and in real estate stamp duty. This can make political sense for the government when five states are going for state elections, although a cut will distort the level playing field. But with tax collections dipping, economy slowing down, cutting taxes in any form can be hazardous. When data for the last quarter is factored in, the growth rate for the year could slip lower.