GST will stimulate Indian economy in medium-term: ADB chief economist

Proceeds from the goods and services tax (GST) will continue to grow, enabling India to step up public spending on infrastructure, which would in the medium term result in faster economic growth, Asian Development Bank chief economist Yasuyuki Sawada said in an interview.
Sawada said the indirect tax reform along with the lingering effect of demonetization, having temporarily led to a slowdown in growth in the fiscal year ended 31 March 2018 to 6.6% from 7.1% in the year before, will now yield strong revenue growth in the medium term and help higher public investments in infrastructure, energy and information and communication technology.
Sawada, who is also director general of the ADB’s Economic Research and Regional Cooperation Department, said India’s economic growth will “bounce back this year and in the next, it will be faster.”
ADB’s Asian Development Outlook 2018, released in April, projected the Indian economy to grow at 7.3% in 2018-19 and by 7.6% in 2019-20. “It is amazingly fast,” said Sawada.
“I think GST is a very important step forward to secure sustainable funding for public investment. In the short term, businesses got adversely affected by these two changes (GST and demonetization), but in the medium term, because the government secures fiscal space to make more public investment in projects, it is a very important driver for economic growth,” said Sawada.
His comments come as the federal indirect tax body, the GST Council, has set a monthly combined revenue target for the union and state governments of Rs1 trillion in fiscal year 2018-19, up from Rs91,000 crore in 2017-18.
Revenue collected in April for March sales went up to Rs1.03 trillion, a figure the government said should not be taken as indicating future trends as it may include the arrears that taxpayers filed for previous months.
As the new indirect tax system, which was rolled out last year, is aimed at making the industry more competitive by removing the cascading effect of tax on items that were already taxed at the previous stages in the value chain, revenue was expected to moderate initially before the economy gathered more momentum from the enhanced efficiency.
To ensure that public spending does not suffer in a difficult year, Union finance minister Arun Jaitley revised the fiscal deficit target for fiscal year 2017-18 to 3.5% of gross domestic product in February from the original target of 3.2%.
It is expected that the government may have improved upon the revised target when the full year figures are available.
“Among the instruments that the government has for stimulating economy, one is public investment, especially in infrastructure to facilitate businesses and consumption. In a domestic consumption driven economy, infrastructure is a precondition for maximizing growth. In order to do this, the government needs funding that is sustainable,” said Sawada, adding that revenue buoyancy from GST will be effective in ensuring this.
The Asian Development Bank estimates that the minimum support price scheme for farm produce announced in the Union budget for the fiscal year 2018-19 will help in boosting rural incomes and rural consumption.

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