India’s massive reforms to tax and the monetary system are already bearing fruit, bringing more companies into the formal sector and reducing unaccounted flows of money through the economy, according to experts from national ratings agency CRISIL Ratings.
On July 1, the Indian government rolled out a single, national goods and services tax to harmonise the various overlapping state levies on businesses. The government has also tried to reduce the role of cash in the economy by removing high denomination notes from circulation.
GST reform is already widening the country’s tax base, according to CRISIL, which is majority owned by S&P Ratings.
‘From the 8 million tax paying entities, which were earlier paying taxes to central and state governments separately, the registrations have gone up by 1 million,’ Prasad Koparkar, senior director, CRISIL Research told Citywire Asia on the sidelines of an S&P Global event held in Singapore on Tuesday.
At the end of July, Indian finance minister Arun Jaitley announced that 90% of the indirect tax paying entities under the earlier tax system had already migrated to the Goods and Services Tax Network, an IT system set up to support the new tax regime. The first GST tax returns will have to be filed in September.
The numbers for the individual income tax base also look promising, according to Dharmakirti Joshi, CRISIL’s chief economist. There has been a 25% increase in individuals registered for income tax, he said. According to the income tax department, INR 2.79 crores ($434 million) had been filed by the extended deadline of August 5. Currently, less than 5% of the Indian populace pays taxes.
Growing tax revenues will help the government achieve its targeted fiscal deficit of 3.5% for fiscal year 2017/18, versus 3.2% in the previous year.
The short-term impact of demonetisation has been more sobering, however. The government removed 500 and 1,000 rupee notes from circulation in November 2016, hitting growth, particularly in the agriculture sector, which relies on cash for transactions.
Real estate was temporarily hit by demonetisation as well. Alongside gold, it is the most popular destination for unaccounted money in India. Just as prices started coming back up, a new regulation came into action in May with the installation of the Real Estate Regulatory Authority, which has led to a considerable drop in the launch of new projects in India in the past two months, said Pawan Agarwal, chief analytical officer, CRISIL Ratings.
Amid all the chaos and headline noise, Agarwal said that global equity and debt investors have been positive on Indian financials, in particular non-banking financial services and private sector banks.
India’s public sector banks have been grappling with problems of non-performing loans, weak profitability and fragile capital positions. The economy is also suffering from weak private investment data, which may hit investment-linked sectors, Koparkar said. Consumer spending should rise, however, meaning that consumer staples and consumer discretionary plays, including autos, media and entertainment, as well as organised retail will continue to do well.
Joshi advised foreign investors to go long on India, which is currently the consensus view. ‘In technical terms, due to the effects of demonetisation and GST in technical terms, the trend rate of growth will move up, but the cycle – the short term - will remain depressed,’ he said.