After India’s growth slumps, finance minister looks to GST for lift

India's Finance and Defence Minister Arun Jaitley attends a two-day meeting of the Goods and Services Tax (GST) Council in Srinagar

By Rajesh Kumar Singh and Mayank Bhardwaj

NEW DELHI (Reuters) – India’s economy should get a lift from the launch of a new sales tax, Finance Minister Arun Jaitley said on Thursday, putting a brave face on a slowdown in growth that followed a government crackdown on “black money”.

Jaitley’s comments came a day after data showed that annual economic growth unexpectedly slipped to 6.1 percent in the January-March quarter, its lowest in more than two years.

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.

The move was aimed at flushing out money Indians hide from the tax authorities, but pounded consumer demand as most people live in the cash economy.

“There are several factors which can contribute to GDP in a particular quarter,” Jaitley told a news conference. “There was some slowdown visible, given the global and domestic situation, even prior to demonetization.”

Asia’s third-largest economy had clocked annual 7.5 percent growth in July-September before Modi removed the oxygen of cash.

Even in the October-December quarter, when the cash crunch was at its peak, growth was 7 percent, letting India remain the fastest growing major economy.

Economic expansion in the latest quarter, lower than China’s 6.9 percent, was hurt by a slowdown in farming, manufacturing and services. Construction activity contracted from a year earlier.

The biggest disappointment was a sharp fall in capital investments.


Since coming to power in May 2014, Modi has ramped up public spending, hoping to boost weak private investments. Yet recovery remains elusive.

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 toward writedowns 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,” 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.

Jaitley didn’t offer any solution to break the investment logjam.

He said the planned July 1 launch of a new Goods and Services Tax (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.

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 percent, slower than the previous year’s 8.0 percent.

Given global conditions, “7-8 percent growth, which at the moment is the Indian normal, is fairly reasonable and by global standards very good,” he said.

(Writing by Rajesh Kumar Singh; Editing by Douglas Busvine and Richard Borsuk)