India's Economic Policies and Their Impact on GDP

The fiscal landscape of India over the past decade has been deeply influenced by significant economic policies, particularly those surrounding cash transactions and tax incentives. These policies, often well-intentioned, have had profound and sometimes detrimental effects on India's Gross Domestic Product (GDP), especially when contrasted with other major economies. This article explores the complexities and consequences of these policies and their impact on the nation's economic trajectory.

The Double-Edged Sword of Cash-Centric Markets

Mr. Narendra Modi's Promises and Early Successes

During his 2013/14 campaign, Mr. Narendra Modi vowed to spur significant economic growth and job creation. In particular, he promised to create 2 crore jobs and launch a war against black money, promising to transfer Rs 15 lakh to every household. These promises, while ambitious, weretoDouble the core of India's emerging economic narrative.

Upon assuming office, Mr. Modi's government initiated a voluntary disclosure scheme for income tax payers. This aimed to combat black money by encouraging transparency and tax compliance. The scheme was initially successful, as it facilitated a large-scale voluntary disclosure of undisclosed income by tax payers.

From Voluntary Disclosure to Demonetization

Following the success of the voluntary disclosure scheme, the government took another bold step with the demonetization of Rs 500 and Rs 1000 notes. The goal was to curb counterfeiting, illegal transactions, and black money. This move, however, had far-reaching consequences on the cash-dependent Indian economy.

While the government received positive public sentiment for launching the scheme, the abrupt transition to a cash-free economy led to severe disruption. ATMs and banks were flooded with people withdrawing cash, leading to a cash crunch. Lenders, banks, and the Reserve Bank of India (RBI) struggled to meet the demand for new notes. Despite these challenges, the government introduced Rs 2000 notes but struggled to provide sufficient changes, exacerbating the problem.

The Aftermath: Economic Consequences and Failure of Fiscal Policies

The Payment of Black Money and Its Impact

According to Dr. Manmohan Singh, the former Finance Minister and Prime Minister, the Indian economy would face a 2% decline due to the demonetization. This prediction was, however, an understatement. The new GST (Goods and Services Tax) regime, introduced to streamline the tax structure, also failed to meet expectations.

The design of GST, without adequate reforms, created numerous issues. The unanticipated challenges led to a continuous decline in the economy, with GDP dropping from 8.2% to 3.1% in the March 2020 quarter, the lowest in five years. The slowdown was exacerbated by the closure of several SMEs and informal sectors, which were crucial drivers of the economy.

Job Crises and Economic Downturn

During this period, the employment situation in India worsened, with job losses in sectors such as Reliance Communications, Tata Airways, and others. Many employees have been left jobless, adding to the economic uncertainties. The slowdown in employment was so severe that headline unemployment figures reached their highest levels in 45 years.

Government Interventions and Their Limited Success

In an effort to spur economic growth, the government sought large amounts from the RBI and introduced tax incentives for corporate companies. The government allocated Rs 1.45 lakh crores to corporate companies to invest in their businesses to stimulate growth. However, the RBI's study revealed that these companies either reduced their debts or increased their reserves, with little investment into their core businesses.

Conclusion: A Call for Reform and Balanced Policies

India's economic policies in the past decade have demonstrated the complexities and challenges of managing a cash-centric market, along with the impact of poorly designed tax incentives. The failure to foresee and mitigate the negative consequences of such policies has led to significant economic decline and job losses. Moving forward, reform in fiscal policies, along with a strategic approach to economic development, is essential to reinvigorate the Indian economy and foster sustainable growth.

Key Points:

Cash-centric market in India Impact of demonetization and GST Job losses and economic downturn Government interventions and their limited success

These factors underscore the need for a more balanced and comprehensive approach to economic policy planning to ensure sustained economic growth and social welfare.