Protectionist tendencies will shrink GDP, warns Arun Jaitley

New Delhi: With protectionist trend emerging in developed economies, Finance Minister Arun Jaitley tonight warned that economies will become more inefficient and GDP will shrink if such a move were to impact trade and movement of goods and people.

He said demonetisation has forced "extraordinary large" amount of cash into the banking system which will not just increase ability of banks to lend at more reasonable rates, but also squeeze informal economy and make India a more tax-compliant society.

"Developed countries have turned protectionist... If it has impact on trade, movement of goods and people, (it) could make economies more inefficient and reduce GDP," he said at the Assocham annual meeting here.

Globally, the world is moving in an unpredictable and slow pace and a prolonged slowdown can pose big problems, he said.

Also, oil prices have risen slightly, threatening inflation and fiscal maths of importing nations like India.

"Having said this, we in India in second phase of reforms, did manage to achieve many areas which were low-hanging fruits... Expanding areas where FDI could be attracted -- it was not a complicated reform," he said.

"India today is prepared for reforms, much more than it ever was in the past. Bulk of the public opinion favours reforms," the finance minister added.

The political cost of reforms, he said, has limitations on bank lending to support growth and so FDI is needed.

On demonetisation of old 500 and 1,000 rupee notes, he said this forced "extraordinary large amount of cash, inherently anonymous, into the banking system".

"Having been forced into the banking system, it compels even the non-compliant to spend excessively through either the banking system or digital mode. This is eventually going to lead to the squeezing of the informal economy and integration into formal economy," Jaitley said further.

"This will eventually lead to larger transactions through banking system, more money into banking, more ability to lend at more reasonable rates... More taxes mean more reasonable rates of taxes," he emphasised.

India requires people to pay taxes, he made it clear.

"We are one of the most non-compliant societies in the world. Why should a compliant taxpayer share the burden of non compliant? It creates an aberration. It will not be an exaggeration to say we are one of most non compliant countries in the world," he reasoned.

The finance minister also made the point that the nation needs to get rid of discretions and arbitrariness as such decisions in allocation of coal and telecom spectrum had an impact on the country's image. 

But with reforms in allocation of natural resources, that underwent a change, he stressed.

"It's image that it's a corrupt society... We were able to substantially write it off if not completely," he noted.

Jaitley said use of Aadhaar unique identification number has become a launching pad for rationalisation of subsidies by directing it to the needy rather than the undeserving.

He is clear that the goods and services tax (GST) will unify India into a single market, with industry getting input credit at every stage and reduced cost.

"It will be a more efficient system that will reduce tax evasion and reduce harassment. Together with demonetisation, it will lead to squeezing of the informal economy and more taxes, which means more reasonable rates of taxation," he said.

"If you combine the two (GST and demonetisation), We create a new normal. Post demonetisation, generating cash will be difficult, spending that cash will be difficult as transaction will be captured," Jaitley said, adding that the government wants to attract people to join the taxation base.