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USA fiscal policy will impact capital flows to India

  • by Emilio Sims
  • in Money
  • — Feb 2, 2017
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India's growth rate will slow by up to half a percentage point due to the government's decision to scrap high-value banknotes, the top finance ministry economist said on Tuesday, challenging independent estimates of a far bigger impact.

Labour and tax policy reforms are needed for apparel and leather sectors as they have vast opportunities for job creation, especially for weaker sections and women, and can become vehicles for broader social transformation in the country, the Economic Survey said today.

By contrast, the International Monetary Fund slashed its India growth forecast for the current fiscal year by a full point to 6.6 per cent, handing the title of the world's fastest-growing economy back to China, which reported 6.7 per cent growth for 2016.

One important reason why the economy will bounce back quickly to the pre-demonetisation levels is that the economy is on a sound footing with the fundamentals firmed up more than ever.

Highlighting the strong macroeconomic fundamentals brought out in the Economic Survey, Banerjee commended the Government for its sound management of the economy during challenging global developments.

The costs of demonetisation include contraction in cash money supply and subsequent, albeit temporary, slowdown in GDP growth, while the benefits to the economy will be in the form of increased digitalisation, greater tax compliance, reduction in real estate prices, increased long-run tax revenue collections and GDP growth. The IMF has slashed its estimate for growth in 2016-17 to 6.6% from 7.6% earlier. While the Survey is optimistic about exports due to expectations of a fiscal stimulus by the United States, he said India was quite vulnerable to restrictions on services.

While sowing of rabi crop is way better than past year and there is no blip in direct and indirect tax collections after demonetisation, there is a dip in real estate sector and banks credit has dropped. Whether or not the government has been successful will be narrated in the Economic Survey.

Asset rehabilitation: Survey suggests setting up of a centralised Public Sector Asset Rehabilitation Agency that will look after the largest, most hard Cases, and make Politically Tough Decisions to reduce Debt.

Finance Minister Arun Jaitley has promoted the concept as "an alternative to the various social welfare schemes in an effort to reduce poverty". It cautioned that "vigilance is essential to prevent other agricultural products becoming in 2017-18 what pulses was in 2015-16 in terms of supply deficiencies and consequential higher inflation".

Commenting on India's Free Trade Agreements (FTAs), the Economic Survey said India will need to carefully weigh the benefits and costs of negotiating new FTAs, such as, with the European Union (EU) and Britain.

The Economic Survey 2016-17 has advocated fast remonetisation, a cut in tax rates and stamp duties and reining in over-zealous tax administration to make India the world's fastest growing major economy again.

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