Essay on India after GST and Demonetization – Effects on GDP and Economy
730 Words essay on India after GST and Demonetization – GST and Demonetization Effects on GDP and Economy .
On 12th November 2016, as the world woke up to the news of Donald Trump‘s ascendancy as the most powerful man of the free world, Indians too had witnessed a financial earthquake. Prime Minister Narendra Modi had declared legal tender of Rs. 500 and Rs. 1000 to be declared invalid. It was an unprecedented shocking move that had baffled the Indian public. The next few days were chaotic and mob-like. Prime Minister Narendra Modi claimed that this move was to wipe out black money from the country and exterminate the informal economy. Serpentine queues were seen before banks and ATMs as people were allowed to withdraw only a small amount of cash each day. Rules were changed almost every day and the agenda or objective kept changing. It soon shifted to a vision of cashless or less cash economy. There was pandemonium on streets. Farmers, workers, small merchants and many such informal sector workforces got into huge troubles due to the shortages of cash in the system. The Opposition political parties made a huge hue and cry over a foul play but were incapable of convincing the public against the massive cult-image of Narendra Modi.
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The commotion over Demonetization faded after few months from the streets but it has practically fractured the economy. Former Prime Minister Dr. Manmohan Singh made an ominous prediction in the Parliament that the GDP of the country would slip by 2 percentage points, a claim which became the truth. The sudden wiping out of 86% of currency from the market in a cash-dependent economy was both a political and financial blunder which couldn’t be justified even by government experts. Former RBI Governor Dr. Raghuram Rajan claimed that the short-term losses created by demonetization outweighed the long-term benefits and that this exercise was unnecessary.
The long-term benefit of decline in corruption cannot be weighed empirically as other incentives of compliance have to be defined clearly. There is no evidence of stock of black money being eliminated as most of that is stashed in not cash but other financial instruments. Financial system savings increased but it had no effect on the huge NPA problem of the banks. Expecting a digital revolution in a matter of one year is unfathomable, but demonetization did have a positive impact with an increase in digital transactions and a decrease of cash-to-GDP ratio. Also, digitization saw an upward trajectory of growth and tax compliance increased. Nevertheless, a report from RBI revelated that 99% of invalidated cash had re-entered the formal financial system again. Among the hardest hit of demonetization was the MSME sector. In fact, Indian economy’s GDP growth came as low as 5.7%.
Next disruption to Indian economy was seen in the Goods and Services Tax, an integrated form of indirect tax. It is considered as the biggest tax reform of independent India. The NDA government managed to pass the contentious GST Bill after much omissions, inclusions, and objections. A GST council has been created with the representation of every state’s finance ministers and chaired by the Union Finance minister, keeping up with the spirit of cooperative federalism. The Council is responsible for deciding the tax slabs. This was a policy restructuring that the nation needed urgently. This unification of taxes has seen several benefits such as inclusion of textile sector and real estate sector in the tax bracket. The tax base of the economy has seen a huge expansion and there would be effective taxation on imports. GST will collect vital information on direct tax collections that would benefit indirectly. Financial inclusion has seen its greatest and best plunge. One of the best benefits of GST is that transport gets smoother and quicker given the delays at check-posts have been removed.
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The sudden implementation of Goods and Services Tax has indeed shaken the economy with issues with exporters, prices of essential products, confusion over tax compliance methods, online transactions, and constant changing of tax rates, the long-term benefits of GST are outstanding. It is a major transformation that will boost the investment potential. World Bank’s upgrade of rank in the Ease of Doing Business Index and Sovereign Rating Agencies increment in ratings to India is a testimony to the fact that the world is acknowledging the huge potential of these changes. Combined with the Insolvency and Bankruptcy Code, stable leadership, alternate adjudication mechanism, revision of Bilateral Investment Treaties, etc. The Indian economy is set to perform with greater vigor and produce astonishing results.