Government Efforts to Maintain Financial Stability

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TOPIC: General Studies 3

• Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

In news: PM called for financial stability which is essential for governance of the country. Steps are being taken for increasing investments and bring in economic development.

What has impacted the economy?

There have been two views on both the big bold reforms which government has brought in.  To weed out corruption, promote a digital economy by less use of cash, identify and remove black money from the economy, big bold reforms in form of GST and demonetisation were needed.  On these two moves, there are two views supporting and opposing it. One set of people believe that bringing this was not a necessity especially at the juncture when the economy is not doing that well. While others hailed it as it was high time that action was taken against corruption and people who were associated with it.

When the GDP growth had come down to 5.7% in 1st quarter it felt that demonetisation and GST would impact GDP in an adverse manner and it has happen so but it is also equally true that what was the option if the government would not have come with these two moves then the pressing issues of the country would still remain addressed or have knee jerk actions of temporary nature which might harm the economy more.

In the latest RBI monetary policy, it has reversed GVA growth from 7.3% to 6.7 %.  So obviously the impact has been there but the good part is the RBI as well as many experts believe that the bad phase of already bottomed out and from here it can see the upward trajectory only.

Also, the impact of big moves like demonetisation and GST take time to concretize and these are early days to forecast its success or failure.

The green shoots

There is huge inflow of FDI in India as well as reaching 400 billion dollars of foreign exchange. Having macroeconomic stability especially maintaining fiscal deficit and current account deficit. Measuring the economy on these parameters when inflation is down as compared to previous year shows that economy is fairly stable.

The cash to GDP has gone down from 12% GDP to 9% GDP which is a major achievement especially with demonetisation move.

In last 3 years, the NPA situation has got accumulated. It has gone from bad to worse and private investments have dried up. In the absence of private investment, upliftment in the economy is a big challenge.  Hence, the government tried to boost the economy through public investment.  Though it might not be beneficial for fiscal consolidation, the result of such moves will not start showing immediately.

There is a need to assemble and sort the data of income tax departments and all the investigating offices which shall investigate all those information that has come through demonetisation. This is expected to bring in large number of people in formal accounts who were not filing returns, not paying taxes and people who were basically subverting and opting different methods like shell companies etc. to evade taxes and hide income. This will lead to additional revenue generation both from GST and demonetisation in future.

What next?

Once there is clear picture about the additional revenue and what kind of revenue from GST is being collected, the government will be in a position to decide how quickly it can alter the GST structure.  Reducing the tax burden on people is the big concern area right now but first they have to stabilise GST administratively.

Along with it, the difficulties regarding GST registration and filing of tax returns on the part of small traders has to be looked into and the government will certainly do the hand holding so that they comply with the rules that has been set by the government regarding taxation.

This is important because, though 80% of the GST comes from 5% of the large tax payers, it is also a fact that 20% of the collection come from 95% of the small ones. This is the chunk of taxpayers from whom revenue can be increased by giving a smooth tax filing options as well as appropriate rate structures.

Another set of problem was with exporters that they were not getting refunds. This issue has also been now resolved as the central government has allowed them to pay a nominal GST of 0.1% on the goods manufactured for exports.

The most critical reform in existing GST structure will be bringing down the tax rates and also including more and more items in GST specially the petroleum products.

It is equally important to maintain honesty and integrity in the system. This was proved by deregistering two and half lakh shell companies by central government. The impact of that would be seen not right now but certainly in the near terms. To get a perspective, Out of 15 lakh registered companies, only 6 lakh files returns which is a big concern on the operation of shell companies. A task force has been created to tackle shell companies. After demonetisation, once the government came to know that the window was again utilised to deposit illegal or unaccounted black money, the action to deregister the shell companies was expedited.

Conclusion

Infrastructure development especially roads and railways has been commended for the new projects taken and implemented. Power sector is also performing well. Public investment has also aided infrastructure development but real challenge is that of how government brings private investment in the infrastructure sector. Though there is record FDI, there are NPA issues pending to be solved which cannot be alone sorted out through recapitalization of banks. Capacity utilization is now a significant focus area for the investments to pour in.

As a forwarding move, RBI has also set up a financial stability unit to carry out periodic stress testing of the banking system and preparing financial stability reports.

All these steps along with proper monitoring of big reforms and expediting necessary related changes will ensure fiscal stability.

Connecting the dots:

• Fiscal stability will determine the economic stability and growth. Explain with suitable examples.