No reason to doubt GDP data, says CII's Chandrajit Banerjee

Interview with Confederation of Indian Industry director general Chandrajit Banerjee

Even as critics doubt the gross domestic product data as put out by the statistics office, Confederation of Indian Industry director general Chandrajit Banerjee tells Indivjal Dhasmana the data is in line with what was expected, given the lack of facts in the informal sector. He says demonetisation will lead to wider use of non-cash payment instruments and that in turn will result in decline in the parallel economy. Edited excerpts:

There are varied interpretation of the impact of demonetisation on the economy. What is your take?

Demonetisation was a transformative move by the government with the objective of cleaning up the unaccounted cash and to discourage holding of unaccounted cash. I believe it has had the intended impact. In a short period of time, the use of cash has considerably diminished among both businesses and consumers. The practice of paying wages in cash is on the decline – even household workers have access to bank accounts and are able to receive and make non-cash payments.

We believe that with wider use of non-cash payment instruments, the size of the parallel economy will begin to decline. Tax payments are likely to rise as more transactions get recorded and there will be greater transparency in business practices. In the last CII Business Outlook Survey, conducted in the immediate aftermath of demonetisation, two-third of the respondents believed that the government’s demonetisation move will help in formalisation of the economy.

Has it hit the economy in the short-run, particularly in the third quarter of the current financial year?

It is hard to determine the extent of the impact and some of the data from CII studies and surveys are quite positive. The CII ASCON survey which tracks production growth trends across sectors has revealed a significant improvement in performance in the October-December quarter. Out of the 83 sectors covered, the number of sectors recording growth higher than 10 per cent have increased while the number of sectors that recorded less than 10 per cent growth declined.

Similarly, a CII study of a large sample of 2130 companies shows that aggregate net sales of this group of companies have grown by 6.5 per cent in the December quarter on a y-o-y basis. This is after a long period of declining sales.

Which are the sectors do you think has been hit most?

There are sectors that have been affected such as cement and two-wheelers. In case of passenger cars, there was a dip in December followed by a sharp recovery in January. Domestic sales of tractors dipped in November but recovered in December and January. Steel was not at all affected and has been growing rapidly.

In general, consumer-facing sectors such as FMCG and durables had been impacted while core sectors have been relatively less impacted, though it is difficult to make any generalisation. As per the CII-ASCON Survey, sector which recorded over 20 per cent growth in the October-December quarter are circuit breakers, construction equipment machinery, machine tools, tractors, utility vehicles, groundnut oil, soya oil and domestic cargo. 

In that context, why is that GDP data did not show much impact in the third quarter? Do you believe the numbers are creditable?

As we have discussed, the performance has been varied across sectors and it is hard to get an aggregate picture. There is also very little data on the performance of the informal sector. Given these constraints, the GDP data captures the available data and is in line with what we have seen. For example, the construction sector has shown moderation as also the services sector (other than public services). The good performance of agriculture reflects the record food production this year while manufacturing reflects the turnaround in corporate sales and profits.

We don't see any reason to doubt the data since it is very much in line with what we have. 

What will be your recommendation to the government to boost consumption and revive investment?

We have been making recommendations and the government has already been working on these. It has increased allocations for public investment substantially in the Union Budget for 2017-18 and several projects in the infrastructure space are moving forward. Infrastructure creation is also key for building manufacturing competitiveness, which will help increase our exports.

Other recommendations on which the government has been making all-out efforts are ease of doing business and smooth implementation of GST. Besides, we would welcome further moves towards enabling flexibility of labour deployment, as has been implemented in the apparel sector. With a continued focus on reforms, I believe we will see a revival of both consumption and investment in the coming year.

There is an issue of long-term capital gains tax imposed on those who had not paid securities transaction tax post-2004. The government is yet to come out with a clarity on which segments will be exempted from it. Do you think it is creating uncertainties?

Section 10(38) exempts the income of all taxpayers from transfer of long term Equity Shares, units of Business trust and equity oriented Mutual Funds which has suffered STT on sale. The proposed amendment would remove the benefit of exemption for transfer of shares post 31 March 2017. The proposed amendment also means that the benefit of exemption shall not be available in case of acquisition of shares post 1 October 2004 which has not been subjected to STT, unless the acquisition of shares is notified as insulated.

The provisions have been amended to prevent misuse of the exemption. Though the intentions are good, certain genuine share purchases, done off-exchanges through grant of ESOPs, even if sold on-exchange, is not eligible for exemption.

Blanket denial of exemption may result in genuine hardship to honest taxpayers. The method adopted by Central Government will result in denial of exemption in 90 per cent of genuine cases where shares are acquired without payment of STT.

Amending this proviso to prospective application and not apply retrospectively along with grandfathering the investments made without payment of STT prior to 31 March, 2017 is an idea. In case the proposed amendment is applied retrospectively, then this should not be imposed on inter se transfer of shares amongst the Promoter Group. We say this because the aggregate holding of Promoter and Promoter Group before and after the inter se transaction still remains the same. Such inter se transfer of shares amongst the Promoter Group is also exempt under SEBI Regulations, 2011.

GAAR will be implemented from the next financial year. Do you think that the FAQs that the tax department has come out with are exhaustive or do you think some more clarifications are required?

We are happy to note and also welcome the issuance of clarifications on implementation of The General Anti-Avoidance Rule (GAAR) provisions under the Income Tax Act. The Government has met its commitment to provide certainty and clarity in the tax rules. These are exhaustive and if more are needed as we move on, it could be sought.

The clarifications viz., GAAR will not interplay with the right of the taxpayer to choose method of implementing a transaction; and adoption of anti-abuse rules in tax treaties may not be sufficient to address all tax avoidance strategies, as the same are required to be tackled through domestic anti-avoidance rules will go a long way to rekindle confidence and send a positive signal to the global investors.