Photographer: Anindito Mukherjee/Bloomberg

Modi’s Cash Ban May Help India Cut Taxes, Power Minister Says

  • Minister Goyal says economy shows signs of stabilizing
  • Automobile sales jump in December indicate effects waning

Prime Minister Narendra Modi’s decision to outlaw high-denomination banknotes will boost revenue collections, help India increase spending on welfare projects and cut taxes, a minister said.

Deposits have outstripped loan growth at Indian banks after people started turning in 500 ($7.35) and 1,000 rupee notes that are no longer legal tender following Modi’s Nov. 8 decision to ban high-value currency notes, effectively canceling 86 percent of cash in circulation. That’s helped them lower lending rates with the biggest state-run bank slashing borrowing costs to a six-year low.

“As more and more money is coming into the formal economy, one can look at more attractive tax rates and lower tax slabs,” Power Minister Piyush Goyal said in an interview on Friday. “Even if half the people who were in the informal sector move in to the formal economy and more taxes get collected, more money can be spent on the welfare.”

Modi’s administration, which is set to announce the budget for the year starting April 1, has already offered interest waivers and cheaper housing loans to the poor last week to shore up popularity after his cash ban hurt farmers, low-income households and businesses. So far support for the move remains strong, as people believe it targets unaccounted wealth, however a deeper economic slowdown could turn voters against the ruling party in key polls over the next two months.

Gross domestic product will grow 7.1 percent in the year through March, the statistics ministry said in a statement in New Delhi on Friday, compared with a 6.8 percent median estimate in a Bloomberg survey. Even though the figure doesn’t include the impact of note ban, the latest estimate is still slower than the 7.7 percent expansion predicted before Modi’s Nov. 8 decision to ban bank notes.

The economy is getting back on track after the initial shock and some economists were overplaying the impact of demonetization, Goyal said, adding that automobile sales and cement dispatches had stabilized. The country’s largest carmaker, Maruti Suzuki India Ltd., said sales had risen in December after contracting in the previous month.

Recent data back economists’ concerns that consumption has been hit. The Nikkei Purchasing Managers’ Index signaled December contractions in both manufacturing and the dominant services sector, which makes up about 60 percent of the economy. A private gauge of consumer sentiment has dipped since mid-December and anecdotal evidence suggests job losses in India’s vast informal sector that employs more than 90 percent of Indian workers.

The RBI last month lowered its growth forecasts but kept interest rates unchanged and said more data needs to be analyzed to assess the impact of the currency ban. Gross value added -- a key input of the gross domestic product -- will grow 7 percent in the year through March instead of the 7.6 percent forecast earlier, it said.

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