Demonetisation could dent GDP growth by 1%: Pankaj Patel

Interview with president, Ficci

Pankaj Patel has taken over as Ficci president at a time when the economy is reeling under the impact of demonetisation and the Budget is barely a month away. He tells Veena Mani and Indivjal Dhasmana that the government should cut direct tax rates to prop up the economy. He says Place of Effective Management (POEM) and the General Anti-Avoidance Rule (GAAR) should be deferred. Edited excerpts:

What is your assessment of the impact of demonetisation on the economic growth for the current financial year?

Our survey suggested that GDP would grow by 7.3% in the current financial year. Subsequently, we haven’t conducted any survey. The Reserve Bank of India has revised down its forecast about the GDP growth. There will be some impact but we expect it to be less than one percentage point for the entire 2016-17 compared to last year. 

The purchasing managers’ indices for services and manufacturing have contracted for December. The author of the survey says GDP growth will slow down in Q3. What is your take?

Some impact would have been there, more on the informal sector than on the formal sector. This is our assessment. 

What’s the feedback from your members on the impact on activities in their areas of operations?

We’re conducting a survey to determine what kind of impact demonetisation has had on various sectors. We believe from the next financial year, the situation should stabilise. 

Some leading banks have cut interest rates. Will it spur the economy?

Interest rate deduction has been a long-standing demand of the industry. This has happened without Reserve Bank’s intervention. Banks have got cheaper money. Hence, they passed it on. It will make EMIs (equated monthly instalments) cheaper. Going forward, banks will be able to lend more to projects at lower interest rates, benefiting them. 

Even after this cut, do you think RBI should cut the repo rate at its meeting next month?

This is the first step. Lending rates should be globally competitive at seven% for the industry. 

There is continued logjam between the Centre and states over goods and services tax (GST). There is uncertainty whether it would be introduced from July or September. What are your views?

After GST law is made public, we need three months to implement GST successfully.

Will there be problems for companies if it’s not rolled out from the beginning of the financial year? Won’t there be accounting problems?

No. It will not be problematic.

Budget is less than a month away. What would you say to the government to prop up demand?

We would like tax reforms. We need to bring down tax rates. Already, there is a roadmap to cut the corporation tax rate to 25% from 30%. Focus should be on how do you make transition from informal to formal sector in a smooth way.

If the government cuts tax rates, how will it find the resources to boost capital expenditure at a time when private investment is subdued?

The government can raise money through bonds, with banks flush with funds for spending on infrastructure. 

Should the norms about POEM and GAAR be deferred?

Too many changes will make it difficult for one to cope with. It is better that they are deferred.