New Delhi: The World Bank believes the demonetization of high value currency notes last year and the upcoming introduction of the goods and services tax (GST) will help India’s economy to grow by 7.2% in fiscal year 2017-18 – the highest rate in the world.
The World Bank believes that demonetization, which caused widespread disruption to the country's diamond trade – which deals mostly in cash-based transactions – only caused temporary disruption in the growth of the national economy.
“In the long-term, demonetization has the potential to accelerate the formalization of the economy… the implementation of the GST is a key complementary reform that will support formalization, as firms have a strong incentive to register with GST to obtain input tax credits,” the World Bank said in its biannual report.
GST will lead to a higher rate of tax collection, a greater uptake of digital financial methods and will make India’s economic fundamentals stronger without increasing the burden on the poor.
“India remains the fastest growing economy in the world and it will get a big boost from its approach to GST which will reduce the cost of doing business for firms,” said Mr. Junaid Ahmad, World Bank country director in India.
Mr. Devendra Kumar Pant, Chief Economist, India Ratings & Research says, “FY17 GDP growth was marginally higher than India Ratings’ (Ind-Ra’s) estimate of 7%. GDP growth was supported by higher growth of net taxed on products (12.8%). However, GVA growth of 6.6% (Ind-Ra forecast: 6.9%) is lowest since FY15. The impact of demonetization is clearly visible in fourth quarter GVA growth of manufacturing (declined to 5.3% from 8.2% in third quarter) and trade hotels, transport & communication and services related to broadcasting (declined to 6.5% from 8.3% in third quarter). While banks were flushed with funds, due to subdued credit offtake, GVA growth of financial, real estate and professional services declined to 2.7% in second half of FY17 from 8.1% in first half of FY17. GVA growth too declined to 6.1% in second half of FY17 from 7.2% in first half of FY17.
On expenditure side, private final consumption expenditure and exports have provided support to FY17 GDP growth. Investment in fourth quarter contracted by 2.1%, it grew by 2.4% in FY17. Exports and government expenditure supported GDP growth in second half of FY17. GDP growth declined to 6.5% in second half of FY17 from 7.7% in first half of FY17.”
