Finance Minister Arun Jaitley: GST to lift economy: After humbling GDP figures.

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.

 

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

Country’s economic growth unexpectedly slowed to its lowest in more than two years, dragged down by construction, manufacturing and trade services, and stripping the country of its status as the world’s fastest-growing major economy.

Wednesday’s figures, however, have not changed expectations for monetary policy. Analysts still expect the Reserve Bank of India (RBI) to keep interest rates on hold.

“We continue to expect the RBI to remain on pause, with any rate hikes ruled out,” said Shubhada Rao, chief economist at YES Bank.

Construction activity contracted 3.7 percent year-on-year in the March quarter compared with a 3.4 percent growth in the prior quarter. Manufacturing grew 5.3 percent in the last quarter from a year ago, slower than an annual rise of 8.2 percent in the December quarter.

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

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”, Jaitley said.

Gross domestic product (GDP) is a monetary measure of the market value of all final goods and services produced in a period (quarterly or yearly). Nominal GDP estimates are commonly used to determine the economic performance of a whole country or region, and to make international comparisons.

Nominal GDP per capita does not, however, reflect differences in the cost of living and the inflation rates of the countries; therefore using a basis of GDP at purchasing power parity (PPP) is arguably more useful when comparing differences in living standards between nations.

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