India’s economic growth made an impressive comeback in the second quarter of the fiscal year 2017-2018 at 6.3% after hitting a three-year low of 5.7% in the previous quarter, majorly due to structural reforms such as demonetisation and the massive destocking ahead of the implementation of the Goods and Services Tax. “The economic activities that registered a growth of over 6% in the Q2 of 2017-18 against the Q2 of 2016-17 are manufacturing, electricity, gas, water supply & other utility services, and trade, hotels, transport & communication and services related to broadcasting,” Ministry of Statistics & Programme Implementation said in a statement. Taking stock the second quarter performance, Finance Minister Arun Jaitley said, “It indicates that perhaps the impact of two very significant structural reforms – demonetisation and GST – is behind us and hopefully in coming quarters we can look for an upwards trajectory.” The Union Finance Minister yesterday, also gave a glimpse of India’s near term economic future. We take a look at six key takeaways.
Reduction in GST slabs
Finance Minister Arun Jaitley on Thursday indicated that the number of slabs of Goods and Services Tax (GST) could be pruned to just three from four currently. The Goods and Services Tax (GST), rolled out on July 1, currently has four tax slabs of 5, 12 18 and 28 per cent. “We started the rationalization (of GST rates) ahead of schedule. Future rationalization will depend on how the revenue moves. We have thinned down the 28% slab. Moving ahead, we will rationalize it further to probably keep only luxury items in the highest bracket,” Arun Jaitley said. This will be achieved by merging the 12% and 18% slab. “We need to consider if we have the scope of merging the 12% and 18% slabs and have an interim rate. We have the lowest rate at 5%, then this new merged rate and the very thin slab of 28%. Eventually, that will be the direction,” Arun Jaitley said yesterday.
Focus on SMEs
The government is looking to prop up growth in the small scale enterprises sector. The Union minister said that the government is looking to focus on the informal as well as small-scale enterprises in the future. “Banks will fund SMEs and the informal sector from the leftover cash it received during demonetisation,” Arun Jaitley said. Further, Arun Jaitley pointed out that bulk of the job creation comes from this segment.
Fiscal Deficit Reduction
The government is looking to trim fiscal deficit to 3.2 percent of gross domestic product in 2017/18 compared with 3.5 percent in the previous year. “The last three years we have an exemplary record as far as maintaining that glide path is concerned. We intend to move on that track,” Arun Jaitley said on Thursday during the sidelines of an event.
In the last ten years, India has spent Rs 60 lakh crore in infrastructure. Finance Minister Arun Jaitley pointed out that the government has increased its allocation to infrastructure in the next budget. “In recent time, the government has increased infrastructure spending”, he said, adding the Budget 2017-18 made allocation of Rs 3.96 lakh crore for infrastructure sector.
Improving Tax Compliance
Arun Jaitley noted that one of the major hindrances to increase infrastructure spending in India has been the low tax compliance. “One of the great challenges which remained in India and that directly impinges on the creation of the world class infrastructure is that India was largely a tax non-complaint society,” he said. According to the Minister, “extraordinarily high taxation rates in the past” had encouraged people to evade taxes. Arun Jaitley also pointed out that Indians need to be nudged to comply to economic norms and that the 5% income tax rate is a ploy to get people to start paying taxes.
Increased dependence on global economy
Arun Jaitley pointed out that India alone cannot generate a double digit growth, but would need the help of the global economy achieve it. “A 10 percent growth is a very challenging figure. It will not merely depend on domestic factors. It will also depend on how the world is moving,” Arun Jaitley said yesterday. According to Minister, exports contribute a lot to GDP, and if they fall due to a slomp in world economy, it could hamper India’s growth. “Exports contribute a sizeable portion to GDP (gross domestic product) itself. That is an area we certainly need to keep our fingers crossed, if the world were to slow down,” Arun Jaitley said.