GST, note ban to boost economy’: 

GST, note ban to boost economy’: 

Context: Economic activity is expected to rebound due to a supportive monetary policy, the effect of the Goods and Services Tax, and the eventual formalization of the economy due to demonetization, according to a report by Fitch Ratings. Introduction: The withdrawal of cash due to demonetization had temporarily hurt economic growth in India, report said The report highlighted the following points:

• Demonetization could help boost government revenue by moving economic activity from the informal to the formal sector, but the withdrawal of 86% of the value of currency in circulation last November created a cash crunch, temporarily hurting economic activity.
• The Goods and Services, applicable from 1 July 2017, will facilitate trade within India and lower transaction costs.
• The report expects growth to pick up soon, helped by the supportive monetary policy of the previous two years- which was facilitated by a surge in bank liquidity due to demonetization-and stepped-up structural reforms.
• The report highlighted the uncertainty over the government committing to reducing its debt and detrimental effect of farm loan waiver’s on state finances.
• “An official committee reviewing the Fiscal Responsibility and Budget Management Act recommended lower government debt to 60% of GDP, but it remains uncertain whether the government will commit to this target,” the report highlighted
• Farm loan waiver scheme rolled out across an increasing number of Indian States could significantly affect the state government finances and undermine efforts to bring general government debt.

Background:

• The Reserve Bank of India (RBI) will announce monetary policy very shorty.
• India’s annual retail inflation eased to 1.54 per cent in June, its slowest pace in more than five years, but is expected to begin rising again through to mid-2018.
• With inflation currently well below its target, the central bank is expected to cut borrowing costs by 25 basis points at its next meeting. It last cut rates, by the same amount, to 6.25 per cent in October 2016
• Having changed its monetary policy stance to neutral from accommodative at the start of the year, the Reserve Bank of India softened its position on policy in June in view of the sharp drop in retail inflation.
• Movements in both the Consumer Price Index for all items (CPI) and Wholesale Price Index (WPI) show declines much below the average inflation target of 4%.
• Low inflation with uncertainty about major output gains over the average growth rate in recent quarters will give relatively low nominal gross domestic product. This could result in lower tax revenues unless one expects sharp growth in the tax base to compensate for the revenue shortfall.

Fitch Rating:

• Fitch Ratings Inc. is one of the “big three credit rating agencies”, the other two being Moody’s and Standard and poor’s.
• It is one of the tree nationally recognized statistical rating organizations (NRSRO) designated by the U.S.