Summary

  • India Works To Unlock Its Potential
  • A Cure For “Residual Seasonality”
  • Gauging Potential GDP

Negotiating the rush-hour traffic of Bangalore is a complex, stressful task requiring exceptional maneuvering skills. But driving isn’t the only complex and time-consuming activity in India. The same could be said for the challenge of steering the Indian economy towards its great promise and away from the peril presented by the population’s varied tastes and preferences.

Economic reforms, initiated in 1991 and continuing today, have contributed to India’s rise as the world’s fastest growing major economy. With a gross domestic product (GDP) of $2.6 trillion last year, the country ranks as the sixth largest economy in the world. Yet in terms of GDP per capita, India is ranked a disappointing 126th. Structurally, the services sector is the backbone of the Indian economy, accounting for 57.1% of GDP. Services make up a sizeable share of Indian exports at 38%, much higher than in other major economies.

In 2014, a single-party majority won the Indian general elections for the first time in thirty years. Prime Minister Narendra Modi embarked on important structural reforms. Prior governing coalitions were more fractured, preventing needed policy decisions to continue growth.



Tax reform has been a focal point. India has historically fared quite poorly when it comes to tax collection. Small transactions are a factor: the average transaction value per user was only $9 in 2016. The demonetization of 2016 punished tax evaders who did business exclusively in cash. Banknotes of ₹500 ($7.50) and ₹1000, accounting for 86% of cash in circulation, were replaced by new ₹500 banknotes and a higher denomination banknote of ₹2000 ($30).

Demonetization enabled the income tax department to collect taxes from individuals and entrepreneurs who had previously kept their cash outside the banking system. This was followed by a rather hasty implementation of the Goods and Services Tax (GST), adding to economic stress. Despite the initial challenges, the GST looks to be a promising reform, as all 29 states in India are now a common market. According to the Economic Survey 2018, four million additional tax payers have registered since demonetization, while the GST has resulted in a 50% increase in new taxpayers.