Home / Politics / Policy /  Indian economy gets more formal in four years of Modi government

New Delhi: A series of structural economic reforms, the crackdown on black money and the use of technology for delivery of public services by the Narendra Modi government, which coincided with a natural explosion in the digital economy, have integrated more people into the formal financial system, boosted cashless transactions and added more taxpayers.

Though demonetisation and the goods and services tax (GST) led to a short-term disruption in economic activity, positive changes in key metrices of the Indian economy are visible over a period of time. For example, there has been a sharp increase in the number of both direct and indirect taxpayers, which is significant as the tax base and payrolls are usually taken as indicators of the formal nature of an economy.

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The government also encouraged start-ups and cashless payment modes, which aided the natural growth already taking place in the digital economy, especially in sectors such as e-commerce.

The number of people who got access to bank accounts under the Jan Dhan Yojana, which lays the foundation for facilitating services such as credit, insurance and pension for account holders, witnessed a sharp jump from 125 million at the end of January 2015 to 316 million in the second week of May 2018.

When people migrate to the formal sector, they get access to some social security benefits. “With the number of persons coming under direct tax and the activities coming under indirect tax increasing as a result of demonetisation and implementation of GST, one could expect that the component of the formal sector in the economy has gone up," said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy, a New Delhi-based think tank.

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Effective number of direct taxpayers, including those who have not filed returns but had their taxes deducted by employers at source, had gone up from 64.7 million in FY2015 to 82.7 million at the end of FY2017, according to Union budget documents.

Indirect taxpayers, too, increased sharply though the numbers at first sight do not tell the entire story. As of December 2017, there were 9.8 million unique GST registrants, slightly more than the 9.4 million taxpayers in the earlier indirect tax system. However, in the old system, taxpayers were registered under different taxes, leading to double or triple counting. If this is accounted for, GST has resulted in an increase in indirect taxpayers by 3.4 million, Economic Survey 2017-18 explained. GST also encouraged small taxpayers, who are not legally required to register, to go for voluntary registration as it allowed them to get tax rebates on their purchases.

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More firms and individuals coming into the tax net also helped to boost the share of central government taxes in the gross domestic product to go up from 9.9% in 2014-15 to 11.6% in 2017-18, as per budget documents.

Bhanumurthy said that the visible favourable outcome of structural reforms are only at a nascent stage and one needs to wait for some more months to see its full impact. The GST Council is now in the process of making it easier for businesses to file returns, which is expected to improve compliance further.


Gireesh Chandra Prasad

Gireesh has over 22 years of experience in business journalism covering diverse aspects of the economy, including finance, taxation, energy, aviation, corporate and bankruptcy laws, accounting and auditing.
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