International Finance

Despite GDP contraction, recent tax reforms hold promise for India’s economy

Reforms have already helped to change mindsets about streamlining business, but their impact on economic indicators could take months to become clear

Major economic reforms have created a more promising outlook for India’s economy, despite ongoing risks associated with GDP contraction and income inequality. In particular, the implementation of the new goods and services tax (GST) in July 2017 may have contributed to India’s recent quarterly slowdown in GDP. However, the sweeping tax reforms carry the potential for more vibrant, long-term growth by clarifying the tax code and bringing more businesses into the traditional economy.

“I feel the economy is doing much better than is generally felt,” noted Adi B. Godrej, Chairman of The Godrej Group, Godrej Industries, India. Godrej said that the GST has been the most significant economic reform the nation has experienced in decades. The reforms have already helped to change mindsets about streamlining business, but their impact on economic indicators could take months to become clear.

As a result of the reforms, many businesses were “dragged kicking and screaming into the traditional economy, into the taxed economy,” said Radhika Aggarwal, Co-Founder and Chief Business Officer of Shopclues, India.

Despite the resistance, the changes have already helped to improve the efficiency of doing business in some sectors. For example, GST lowered the cost of transporting goods by 30% through the elimination of checkpoints and other transport bottlenecks, according to Ramesh Abhishek, Secretary of Industrial Policy and Promotion of India. Such reductions could improve the competitiveness of exports and improve access to domestic markets.

Another major change facing India’s economy involves its response to increasing automation and digitalization, which threaten to eliminate many industrial, low-skilled jobs. India needs to create new jobs to reduce unemployment, re-situate workers affected by automation, and improve prospects for its young population. Both the government and the private sector can play a more active role in skills development and training. Further, automation could create opportunities in sectors other than manufacturing, such as logistics, retail and e-commerce, to offset industrial job losses.

Ensuring that India can overcome challenges – such as the transition to a digital economy and inclusive growth – will require the involvement of the local and central government, as well as the private sector. So far, the central government has proven itself willing to implement change. “The reform story is very strong,” said Abhishek. Nonetheless, it could take months if not years to understand how those reforms play out.

What's New

Australian unemployment rate rises more than expected in April

IFM Correspondent

IF Insights: Crises-ridden Egypt economy undertakes its much-needed course correction

IFM Correspondent

Talks of ECB rate cut gather further strength as Eurozone inflation remains steady

Leave a Comment

* By using this form you agree with the storage and handling of your data by this website.