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GST & demonetization had serious impact on growth in India: Former RBI governor

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New Delhi: Commenting on the growth of India, Former RBI governor Raghuram Rajan said that Goods and Services Tax and demonetization had serious impact on growth of India.

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Addressing an audience at the University of California in Berkeley on Friday, Rajan said for four years — 2012 to 2016 — India was growing at a faster pace before it was hit by two major headwinds. “The two successive shocks of demonetisation and GST had a serious impact on growth in India. Growth has fallen off interestingly at a time when growth in the global economy has been peaking,” he said delivering the second Bhattacharya Lectureship on the Future of India.

On the second anniversary of demonetisation on November 8, finance minister Arun Jaitley staunchly defended the drive, saying ‘prophets of doom’ have been proven wrong as hard data of two years shows an increase in tax base, greater formalisation of the economy and India retaining the fastest growing economy tag for the fifth year in a row. “By the time the first five years of this government are over, we will be close to doubling the assessed base,” he said in a Facebook blog ‘Impact of Demonetisation’.

Rajan, in his address, said a growth rate of 7% per year for 25 years is “very very strong”, but in some sense this has become the new Hindu rate of growth, which earlier used to be 3.5%, Rajan said. “The reality is that seven is not enough for the kind of people coming into the labour market and we need jobs for them, so we need more and cannot be satisfied at this level,” he said. Observing that India is sensitive to global growth, he said India has become a much more open economy, and if the world grows, it also grows more. “What happened in 2017 is that even as the world picked up, India went down. That reflects the fact that these blows (demonetisation and GST) have really really been hard blows…Because of these headwinds we have been held back,” he said.

While India’s growth is picking up again, there is the issue of oil prices, the economist noted, referring to the
huge reliance of India on import of oil for its energy needs. With oil prices going up, Rajan said things are going to be little tougher for the Indian economy, even though the country is recovering from the headwinds of demonetisation and initial hurdles in the implementation of the GST.

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