After Growth Slumps, Finance Minister Arun Jaitley Looks To GST For Lift

After Growth Slumps, Finance Minister Arun Jaitley Looks To GST For Lift

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Finance Minister Arun Jaitley said the planned July 1 launch of GST would boost economic growth

Finance Minister Arun Jaitley said the planned July 1 launch of GST would boost economic growth
Finance Minister Arun Jaitley said on Thursday that the economy should get a lift from the launch of the Goods and Services Tax (GST). Mr Jaitley’s comments came a day after data showed that annual economic growth unexpectedly slipped to 6.1 per cent in the January-March quarter – its lowest in more than two years.

Prime Minister Narendra Modi’s shock decision last November to outlaw high value banknotes took 86 per cent of currency out of circulation virtually overnight.

The move was aimed at cracking down on black money, but hit consumer demand.
“There are several factors which can contribute to GDP in a particular quarter,” Mr Jaitley told a news conference. “There was some slowdown visible, given the global and domestic situation, even prior to demonetisation.”

Asia’s third-largest economy had clocked annual 7.5 per cent growth in July-September.

Even in the October-December quarter, during which the demonetisation of high value currency notes was announced, growth was 7 per cent, with India remaining the fastest growing major economy.

Economic expansion in the latest quarter, lower than China’s 6.9 per cent, was hurt by a slowdown in farming, manufacturing and services. Construction activity contracted from a year earlier.

The biggest disappointment was a sharp fall in capital investments.

Investment gridlock

Since coming to power in May 2014, PM Modi has ramped up public spending, hoping to boost weak private investments. Yet recovery remains elusive.

Mr Jaitley conceded that getting higher corporate spending remained a challenge, but said that was partly due to the inability of a debt-laden banking sector to fund investments.

Saddled with $150 billion of sour debts, banks have been slow to grant loans, especially to businesses perceived as riskier.

New Delhi recently gave more powers to the Reserve Bank of India to push reluctant lenders towards write-downs and errant borrowers into insolvency. But bankers say the measure is not enough to draw a line under soaring debts.

“Resolution of the bank non-performing loans is still a work in progress,” Mr Jaitley said. “It’s a major challenge because it also impacts the capacity of the banking system to support growth.”

While risk aversion is choking off new credit, corporates are struggling with idle capacity and stretched balance sheets, and have little appetite for fresh investments.

Mr Jaitley said the planned July 1 launch of GST would boost economic growth and the government was “in a state of preparedness” for the rollout.

However, some analysts say the launch might hurt near-term growth as businesses could delay production until they have clarity on GST’s impact on existing stock.

Mr Jaitley dismissed those concerns as “erroneous”.

He lauded the economy’s performance in the fiscal year that ended in March. GDP growth was 7.1 per cent, slower than the previous year’s 8.0 per cent.

Given global conditions, “7-8 per cent growth, which at the moment is the Indian normal, is fairly reasonable and by global standards very good”, he said.
© Thomson Reuters 2017
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