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Reforms to Boost India’s Medium-Term Growth

Relaxation of foreign investment restrictions, passage of the GST, and advancement of a workable bankruptcy code have potential to stimulate private sector investment, which could lead to stable, balanced growth and gradually lower the government’s debt b
Inflation is expected to have cooled to a two-year low in December as the government’s surprise currency crackdown rattled the economy and severely hurt consumption. Inflation is expected to have cooled to a two-year low in December as the government’s surprise currency crackdown rattled the economy and severely hurt consumption.

International rating agency Moody’s Investors Service has maintained a positive outlook on India and said that beyond the short-term negative impact on growth, demonetization has the potential to raise government revenues and provide some fiscal space to support growth if required.

“We maintained a positive outlook on India’s (Baa3 positive) rating in November 2016 based on our expectation that economic and institutional reforms will support continued robust growth,” the New York City headquartered agency said in its latest report on Asia-Pacific, PTI reported.

It said measures including relaxation of foreign investment restrictions, passage of the Goods and Services Tax, and advancement of a workable bankruptcy code have potential to stimulate private sector investment, which could lead to stable, balanced growth and gradually lower the government’s debt burden.

The agency said the ongoing implementation of reforms is likely to boost medium-term growth.

The report said that in the context of downside risks to the global growth outlook and the possibility of faster increases in US interest rates than investors currently assume, capital inflows to emerging markets could taper abruptly.

Need Bold Reforms

Finance Minister Arun Jaitley once again highlighted the advantage of taking bold decisions for betterment of Indian economy.

Speaking at the Vibrant Gujarat Summit on Wednesday, he said: "India needs bold decisions, time now to clean up table. Difficult decisions initially pass through difficult phases."

Jaitley also attacked the excessive inflow of cash in the economy and added, "Excess paper currency had its own vices. It leads to its own temptations and we have seen the following in India."

Anticipating a swift implementation of GST, he said, "Most of the issues have been resolved, few critical issues are left which I hope that will be resolved in the next few weeks."

On January 8, Jaitley had said that just because large quantum of high denominational currency has been deposited with the banks does not render this money to be legitimate cash, adding revenue department would be entitled to tax this money.

"Black money does not change its color merely because it is deposited in banks. On the contrary, it loses its anonymity and can now be identified with its owner," the FM wrote in a Facebook blog taking stock after two months of demonetization.

Most of money was anyway expected to come back after the government announced a declaration scheme.

"In any case, the amendment to the Income Tax Act itself provides that the said money, if voluntarily declared or if involuntarily detected, would be liable for differential and high rates of taxation and penalty," Jaitley said.

Inflation Seen Cooling

Inflation is expected to have cooled to a two-year low in December as the government's surprise currency crackdown rattled the economy and severely hurt consumption, a Reuters poll found.

Retail inflation likely eased to 3.57% from a year earlier, from 3.63% in November, the poll of over 30 economists showed.

That would be the lowest since November 2014, and well below the Reserve Bank of India's near-term target of 5% by March 2017.

Prime Minister Narendra Modi's decision on Nov. 8 to outlaw high-value bank notes, aimed at curbing corruption and tax evasion, has forced the nation's 1.2 billion people to scramble to exchange old notes for new and left many companies' cash-reliant supply chains in tatters.

The government insists the impact from the move will be short-lived, but many private economists are trimming their GDP forecasts, reckoning it will linger for one more year.

"We expect headline CPI inflation to fall, primarily due to a significant sequential fall in the prices of several food items and many other perishables on account of the cash crunch created by demonetization," said Rupa Rege Nitsure, group chief economist at L&T Financial Services in Mumbai.

India's central bank unexpectedly left its repo rate unchanged at 6.25% last month, saying the blow from the cash squeeze may be transitory and expressing concern over the rising risk of inflation from higher global oil prices.

 

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