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EIU: Economy to pick up only after painful readjustment

LiveMint logoLiveMint 04-10-2017 Asit Ranjan Mishra &

New Delhi: The Indian economy has to endure a painful process of readjustment following demonetization and implementation of goods and services tax (GST) before growth outlook improves starting 2018-19, the Economist Intelligence Unit (EIU) said in a recent note.

The EIU said reforms and policy initiatives introduced by the government and the Reserve Bank of India (RBI) have fundamentally altered the business landscape.

“Efforts aimed at raising tax compliance and increasing formalisation of the economy will raise the growth outlook in the years ahead. However, it is becoming increasingly apparent that many businesses are struggling to adapt to the new reality of doing business in India. Consequently, the economy is poised for a difficult period of adjustment, as reflected in the recent deceleration of real GDP growth,” it said.

The country’s economic growth slowed to a three-year low at 5.7% in the June quarter of 2017-18 as companies slashed production ahead of the implementation of GST starting July. Most economists have pared their growth forecasts below 7% for 2017-18. The RBI monetary policy review on Wednesday too reduced growth projection as measured by gross value added (GVA) to 6.7% for 2017-18 from 7.3% projected earlier.

According to Arun Maira, management consultant and former member of the Planning Commission, the fundamental issue that merits serious attention is that the current pattern of economic growth does not provide enough opportunity for people to have sufficient income.

The EIU note said the growth slowdown of the past six quarters can be partly explained as a result of initiatives launched by the government and RBI. “These efforts have fundamentally changed the way companies in India operate and will yield long-term benefits. Few sectors will be exempt from the impact of these changes, but in the short term, the necessary adjustment process has led to an unusually long period of slowing growth,” EIU said.

Bank credit growth, at 5.1%, has also slipped to its lowest in 2016-17, as public sector banks burdened with heavy bad loans struggled to lend money for sound business proposals. This was the lowest since fiscal 1953-54 when it grew a tepid 1.8%.

The EIU said the deceleration in bank credit growth to industry is partly attributable to the RBI’s initiatives and the BJP’s efforts to reduce corruption at higher levels of business and government.

“However, the difficult business environment and slow-moving judicial system will make the transition to a more market-driven financial system extremely difficult. We believe that a revival in private investment depends on the government injecting additional capital to banks’ balance sheets, but also on companies readjusting their business models to the new financial system,” it added.

After GST was rolled out nationwide on 1 July, businesses and traders have been struggling to measure up in the first two monthly tax-filing cycles, making headlines about inadequate preparedness for the massive tax reform.

The EIU said the impact of GST will be particularly strong in sectors with linkages between formal and informal enterprises along the value chain, such as textiles.

“Informal-sector enterprises will by and large have to register with the relevant authorities, in the process providing the tax authorities with data on the operations of thousands of new companies. In the short term, this adjustment will prove difficult for many informal enterprises, as they often lack the scale or expertise required to compete in the new business landscape,” it said.

Through policy initiatives like demonetization and GST, the EIU said, the government authorities have succeeded in making it much more difficult for companies to operate outside the ambit of the regulatory, legal and tax frameworks, though there has been less progress in making it easier to operate within the bounds of the formal economy.

“The big question therefore is whether the push for increased transparency in the financial system, greater tax compliance through the GST and increased scale is occurring before the government has laid the foundation for companies to transition to the new economy. Given the uncertainties generated by the transition to a new normal, downside risks to the economic outlook will outweigh upside ones (particularly with regards to the slump in private investment),” it said, however, maintaining that economy will rebound after a period of painful adjustment.

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