Demonetisation and GST: Raghuram Rajan quick to discern headwinds, but loath to read straws in the wind

Raghuram Rajan, the former Reserve Bank of India (RBI) governor is at it again. This time around he has blamed the Narendra Modi government’s back-to-back economic game-changers, demonetisation and Goods and Services Tax (GST), for holding back growth in 2017. He says 7 percent is not good enough.

Rajiv Kumar, Vice-Chairman NITI Ayog, has hit the nail on the head while countering Rajan—it was a false narrative to say that note ban was the cause behind declining growth rate. If you look at the statistics on growth rate, in the post-demonetisation period, the growth rate came down not because of note ban but because there was a declining trend for the last six quarters. Every successive quarter, the growth rate had been coming down. Starting from last quarter of 2015-16, the growth rate had come down for six successive quarters. So, this was just simply a continuation of a trend and not because of a shock due to demonetisation as it is being claimed .”

To be sure, medium and small enterprises (MSE) were hit by the cataclysmic demonetisation when ATMs and bank coffers went dry but the damage was well-contained within two months. And the back-to-back ushering in of GST on 1 July 2017 has set the government’s cash registers ringing. Monthly GST collections of more Rs 1 lakh crore in October 2018 was not a one-off event, with the coveted mark being achieved every now and then. Rajan and his ilk should read the then Chief Economic Advisor Arvind Subramanian’s Economic Survey report in the run-up to the Budget 2018 carefully before jumping to any hasty conclusions.

The highlights of his report insofar as GST is concerned  are:

1. The GST implementation has increased indirect taxpayer base by more than 50 percent with 34 lakh businesses coming into the tax net,

2. GST registrants rose mainly on account of large increase in voluntary registrations, especially by small enterprises that buy from large enterprises and want to avail themselves of input tax credits. About 17 lakh businesses registered under GST despite their turnover being below the threshold limit of Rs 20 lakh,

3. As on December 2017, 98 lakh businesses were registered under the GST regime, higher than the total indirect tax registrants under the old system,

4. The pre-GST revenue collection by the Centre and states was Rs 9.7 lakh crore, while the estimated annualised GST revenue collection is expected at Rs 10.9 lakh crore. This is in fact more than coming true with the monthly collections of Rs 1 lakh crore not in the realm of expectations but materialising.

The truth is demonetisation and GST has together changed the way business is done in India. On the back of GST, direct taxes collections are also on the rise. Income Tax collection in the country stood at a record Rs 10.03 lakh crore during 2017-18 as per the Central Board of Direct Taxes (CBDT).

During 2017-18, a record number of 6.92 crore Income Tax returns were filed, which was 1.31 crore more than 5.61 crore returns filed in 2016-17. It is churlish and irresponsible to dismiss off this rub-off effect on income taxes triggered by GST as not emanating out of demonetisation and GST but due to 7th Pay Commission pay hike and One Rank One Pension (OROP) to the armed forces.

Let us face it. Demonetisation shook the cash economy like nothing else with 86 percent of the currency in circulation being sucked out overnight. That cash cannot be the King has now dawned on the nation’s consciousness. And the back-to-back implementation of GST (serendipitously or deliberately one doesn’t know) has mainstreamed the economy like nothing else has in the post-Independence history of India.

GST’s much-vaunted self-policing mechanism has put the fear of God in traders who know that their goose has been cooked not only on the indirect taxes front but also on direct taxes. In short, the twin measures have rudely woken up the nation inured to doing things informally through cash and kachcha invoices. Modi has put his foot down against business as usual and the chalta hai (par for the course) attitude. When such bold measures are taken, it does slow down the growth a wee bit but lays ground for quicker growth in the future. Alas! Only if Rajan had read this futuristic straw in the wind like Arvind Subramanian had.

That digital payments have caught the imagination of the people more post-demonetization as evident from increase card and net banking payments is a good news by itself but more heartening is the usage of BHIM which is India’s own financial engineering that tweaks Aadhaar so that it works as an improvised debit card. This is a signal that rural India, too, is warming up to in non-cash payments.

Rajan and his ilk alas have missed the wood for the trees. While 8 percent growth is indeed desirable, 7 percent clocked last year is nothing to scoff at.

Rajan says India missed the bus by not joining the global revival. The twin paradigm of changing economic reforms, demonetisation and GST, have laid the ground for rapid growth in the future, mainly on the back of the mainstreaming of the economy. Having said that, it must be conceded that jobless growth is a cause for concern. But then this is a legacy the Modi government inherited from the UPA government which Rajan served first as a bureaucrat in the finance ministry for three years and then as RBI governor for three years. It is easy to harangue your successors with the benefit of hindsight.

And the less said about his suggestion for solving the vexed non-performing asset (NPA) issue the better (as in the IE report mentioned earlier). He says clean-up the PSB balancesheets, implying thereby more and more good money should be thrown after the bad. Not a word about Insolvency and Bankruptcy Code (IBC) initiative of the Modi government.

(The author is a senior columnist and tweets @smurlidharan)