As we reach the anniversary of the demonetisation exercise on November 8, 2016 that took away from circulation high value 500 and 1000 rupee denominations from circulation, and four months into implementation of Goods and Services Tax (GST), it is perhaps time to look at how it has impacted the economy.
Former Prime Minister Manmohan Singh has called the demonetisation exercise a monumental blunder while Finance Minister Arun Jaitley has said it will be the pride of the next generation. Over the past year, digital payments have become more popular among people, currency in circulation has been reduced and black money converted to white money is now flowing into stock markets and savings schemes.
The implementation of GST has caused inflationary trends in the economy even as small traders were badly affected by the move. The unorganised sector under Small and Medium Enterprises (SME) category has been badly affected across the country and it may take some time for them to become part of the mainstream industry.
As Lateral Thinking exponent Edward De Bono has said in his book Future Positive, the society consists of various structures and when you dismantle one a new one is created. When you demolish a currency based system, it has to be replaced with a digital system and government intends to make it a cash-less economy in due course. Similarly, multiplicity of taxes for industry has been replaced by a single tax structure called GST which is applicable across the country.
In the meantime, several people may be affected by the changeover and this in turn will be visible in the lower GDP growth.
Linking all transactions to Aadhar has brought in transparency in the system preventing money laundering and understatement of assets. Food subsidies and other welfare measures linked to Aadhar has helped prevent selling of such goods in the open market. This helps beneficiaries to get their due.
Earnings and Demand Recovery
The economy is indeed going through the pains of the twin reforms – demonetisation and GST. The success of the measures would depend on how fast the economy can return to growth path and report better earnings. The September quarter has been encouraging as combined revenue growth of 498 companies at 11.4% y-o-y was the second highest in the last 12 quarters. But net profitability grew by only 4.3%.
Reports suggest that some sectors have witnessed a turnaround- for eg. Consumer goods industry has seen profits rise by 8.4% y-o-y while digital transactions in kirana stores are also up.
GST implementation is likely to bring more money into Government coffers and if such money is utilised for social welfare programs and infrastructure, it will lead to more employment generation and consequently wealth creation.
When more small and medium businesses come under the ambit of GST, the current slowdown may ease and economy may be back on the growth track. As many as 10 mn businesses have registered on the GST Network of which 2.8 mn are new registrants.
Despite the hardships suffered by the people on account of economic reforms, the popularity of the BJP government hasn’t declined but they are getting more acceptance across industry and other sections of society.
The Economic Times in its editorial described the reforms as a resounding success and what now needs to be done is the cleaning up of political funding!
In the short run, what appears to be a curse should end up as a boon for the economy and its people.