Demonetisation to hit industry in the short run, says PHDCCI

Gopal Jiwarajka
President, PHDCCI talks to Sanjeev Sharma 

An inadvertent implication of demonetisation on direct tax mechanism will be drop in income tax rates in the coming Budget, says Gopal Jiwarajka, President, PHDCCI.

Q: What has been the impact of demonetisation on the economy?

A: This is one of the most unprecedented reforms of independent India. Though it is bound to hold some inconvenience to the public at large and other segments of the society, including industry in the short run, I believe India is sufficiently geared up to take on such an inconvenience for the national cause.

The results can be bifurcated according to the lag effect, viz. immediate effect and deferred effect. Currently, all focus has been on the immediate implication, viz. turmoil in the market, drastic impact on business across all segments and decline in demand and so on.

This has implications for working class and small and medium cash-driven sectors such as agriculture, construction sector and MSMEs.

The immediate effect would probably be short-lived and the deferred effect will drive the Indian economy to new areas of growth in the coming years.

Q: What is the expected fall in GDP growth as a consequence?

A: The fall in GDP as projected by various economists and analysts will remain in the band of 0.4-2% during the Q3 2016-17. Though the contraction in GDP cannot be ruled out due to fall in economic activity, growth in demand will start gaining momentum once the economy moves out of the transition stage of demonetisation and remonetisation.

Q: How the informal sector and SMEs will cope with the fallout?

A: MSMEs are significant contributors to manufacturing sector and play a vital role in providing large employment opportunities to the nation wherein majority of the employment occurs under contractual basis. The sector is highly driven by day-to-day cash transactions for raw materials, intermediate goods, paying wages, etc. Due to the demonetisation process, MSMEs have faced the cash crunch that has impacted their production activity to an extent.

In a nutshell, MSMEs are impacted in short run primarily on the back of cash crunch. However, as the demonetisation process subsides, the MSMEs will witness an expansion in production possibilities in the medium to long run.

Q: What is the PHD Chamber’s view on demonetisation policy?

A: I believe there is a good scope for reduction in repo rate in the forthcoming monetary policy statement scheduled on December 7. Repo rate at this juncture should not be more than 6% to give a big push to the economy with the new currency in circulation.

The economic activity is expected to regain its momentum in the coming months on the basis of higher circulation of money, cheaper loans, reduction in inflation, and higher aggregate demand.

Q: Following demonetisation, what are the expectations from the Union Budget on the issue of direct taxes?

A: On the fiscal side, demonetisation led to drastic increase in deposits. Out of the deposits flowing into banks, if a major portion turned out to be tax-evaded income, the respective deposits will generate an exponential flow of direct tax revenue into the government’s account.

With better tax compliance and larger tax base, the government can reduce the tax brackets to an extent.