GST and Demonetization Destroyed Economy, is it True?
The biggest two reforms of our country were introduced during the tenure of Modi government i.e. Demonetization and Goods and Services Tax (GST), both of which had a huge impact on the working and functioning of the Indian economy. The government of India announced demonetization of all Rs.500 and Rs. 1,000 notes of the Mahatma Gandhi Series, on 8th November, 2016 that left the whole country in shock. It was an unplanned step ever taken in the economy by the Indian Government till date. On the other hand, the Goods and Service Tax Act came into effect from 1 July, 2017, just 8 months after the draconian demonetization step that left the entire country surprised.
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The first major reform i.e.. Demonetization got mixed reviews from everyone. It was a step taken by the government in order to curtail the shadow economy and reduce the use of illicit and counterfeit cash to fund illegal activity and terrorism. Its announcement was followed by prolonged cash shortages in the weeks that followed. It created significant disruption throughout the economy. People had to stand in long queues outside the bank and post offices where old notes were being exchanged in place of the new ones. There was a lot of anger among the people as it became very difficult to convert the old notes. Health of many people was getting affected due to standing under the scorching heat of the sun.
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In the beginning, a difficult situation also got created for the people who were hoarding humongous black money in their houses and business enterprises. But due to various loopholes in the banking system like dishonest employees and managers of the banks , not much of the black money could be traced. According to a 2018 report from the Reserve Bank of India, approximately 99.3% of the demonetized banknotes, or ₹15.30 lakh crore (15.3 trillion) of the ₹15.41 lakh crore that had been demonetized, were deposited with the banking system. The banknotes that were not deposited were only worth ₹10,720 crore (107.2 billion), leading analysts to state that the effort had failed to remove black money from the economy.
People were losing blue collar jobs in the industry. Industrial production contracted to four-month low of 0.4 per cent in December 2016 with consumer durables output plummeting by over 10 per cent and an overall decline in manufacturing. But a positive change was seen in the increase of digital payments.
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The debit card point of sale transactions was twice the size of value suggested by trend before the demonetization. The value of credit card increased but no sharp growth was seen. The mobile wallet transactions picked immediately after the demonetizations followed by dip in mid-2017 due to easing cash shortage. People started using more of mobile wallets like Paytm, PhonePe etc. By April 2018, the volume of the digital payments had doubled. After return of the cash, the growth in digital payment had been modest.
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The second major reform i.e. the Goods and Service Tax was introduced with the main objective of subsuming all other taxes and bring all the goods and services being produced in the country under the ambit of one tax, where charge is being put on goods and services on destination basis. This step was welcomed by politicians, business firms and common man.
Due to the introduction of GST, cascading effect of tax has been removed, higher threshold limit has been set for registration, composition scheme is there for micro, small and medium enterprises, efficiency has increased in logistics and unorganized sector is getting regulated. But the technicalities of GST implementation in India have been criticized by global financial institutions, sections of Indian media and opposition political parties. World Bank’s 2018 version of India Development Update described India’s version of GST as too complex, noticing various flaws compared to GST systems prevalent in other countries; most significantly, the second highest tax rate among a sample of 115 countries at 28%. Tax refund delays and too much documentation and administrative effort are being criticized.
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According to a partner at PwC India, when the first GST returns were filed in August 2017, the system crashed under the weight of filings. The opposition Congress party has consistently been among the most vocal opponents of GST implementation in India. They name it as “Gabbar Singh Tax”, a name kept after an ill-famed, fictional dacoit in Bollywood films.
Sectors not affected by Goods and Service Tax
Both the financial reforms i.e. Demonetization and GST have had shortcomings in the short run but they are considered to be good in the long run. Steps are being taken to overcome the shortcomings of GST. A rise in digital payments is seen in the economy due to demonetization. Many of the essential commodities like milk, tea etc. have been kept under the negative list of GST thereby putting less burden on the common man. Both the steps in all can be considered a boon as well as a bane.
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The author of above article is Tanuja Puri, Assistant Professor.
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