July 05, 2018

The challenge of formalizing the Indian economy

In this Mint column, Resident Senior Fellow, Vivek Dehejia writes on the challenges India faces as it attempts to formalise the economy, which was one of the common goals of demonetisation and GST. Excerpts:


"As regular readers will be aware, the last instalment of this column, co-written with Rupa Subramanya, tested the notion that demonetization succeeded in making India into a less-cash society—in other words, pushed digitization—which is one facet of the goal of formalization. As we saw, despite the best of intentions, and of hopes for success, the goal of less-cash has not been realized.


What about the other dimensions of formalization? These may be conceptualized broadly as the process of bringing more business firms and households under the tax and regulatory nets—whether of corporate tax, personal income tax, GST, provident fund contributions, labour laws, environmental regulations, and so forth. Evidently, both demonetization and the creation of GST should push in this direction, as it becomes more difficult for firms and people to remain in the black or grey economies, which operate almost entirely on a cash basis and which fly below the radar screen of taxation and regulation.


The crux, as I argued in a small group meeting with Prime Minister Narendra Modi convened by NITI Aayog in December 2016, must be to supplement sticks with carrots. Demonetization and GST are clearly sticks, but what would be needed would be carrots in the form of a reduced tax and regulatory burden—in short, an improved ease of doing business, and, more broadly, a reduced role for the state in the economy—which would entice businesses and households into the formal economy, rather than yank them into it under duress..."


Read the whole article here.


This article was republished on Stratfor here.

Topic : Transitions / In : OP-EDS
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