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Demonetisation and Union Budget

It is the day after the Union Budget 2016-17. The following statements were made about demonetisation.

1. Demonetisation was a bold and decisive strike in a series of measures to arrive at a new normal of bigger, cleaner and real GDP.

2. Demonetisation and GST will have an epoch making impact.

3. For many decades tax evasion was way of life for many. Post demonetisation, India is moving towards a formal economy. The government is now seen as a trusted custodian of public money.

4. There has been higher GDP growth and tax collection due to demonetisation.

5. After the demonetisation, the preliminary analysis of data received in respect of deposits made by people in old currency presents a revealing picture. During the period 8th November to 30th December 2016, deposits between Rs2 lakh and Rs80 lakh were made in about 1.09 crore accounts with an average deposit size of Rs5.03 lakh. Deposits of more than 80 lakh were made in 1.48 lakh accounts with average deposit size of Rs3.31 crores.

6. Pace of remonetisation has picked up and will soon reach comfortable levels. The impact of demonetisation will not spill over into the next year.

7. Drop in economic activity, if any, during remonetisation period, is expected to have transient effect on economy.

8. Any adverse impacts of demonetisation on the informal sector would be offset by a surge in the formal sector, higher tax collection translating into higher government spending.

Its been 31 days since demonetisation got over. Still no data released on the total currency that was exchanged, counterfeit currency trapped, and the total black money that has been eliminated by the system. Instead, the percentage growth in digital transactions is being highlighted, which had a very low base. The poor who got the worst blow from demonetisation, primarily because the Co-operative Banks were not allowed to exchange currency.

How long does the major institution take to count money? If it takes this long to count, I wonder how long will it take to scrutinize the Income tax cases.

It is critical, now more than ever, to resolve the cash crunch as fast as possible and bring things back to normalcy. The government can’t expect a miraculous shift to digital payments in a few months replacing a world of cash. Estimates are that 70 percent of the economy still transacts in cash. Pulling out 86 percent cash in one go in a country like India and then facing a cash shortage could be compared to an act of removing blood out of a healthy human body to filling it again with better quality blood, only to realize that there is not enough stock!

Until 19 December, the RBI has infused only Rs 5.92 lakh crore into the banking system as compared with deposits worth Rs 12.44 lakh crore in old Rs 500, Rs 1,000 currencies as on 10 December. Of the total 22.6 billion pieces of notes of various denominations infused, only 2.2 billion belonged to higher denominations of Rs 2,000 and Rs 500. It is not clear how many of the 2.2 billion is in Rs 2,000 notes and how many are Rs 500 notes. Herein lies the problem. The ongoing cash crunch, according to bankers, is mainly due to shortage of the new Rs 500 notes. An end to the current cash crunch is possible only when there is enough Rs 500 notes coming out of the government mints.

I find it concerning that despite the government’s claims about rapid GDP growth, indicators such as credit growth, private investment, export performance and job creation point to a weaker economy.

However, I am glad that the budget was a populist, and rightly so after the difficulties faced by the common people of India. Small and medium enterprises got a tax cut. “Honest” income tax payers were rewarded with a tax cut, too. Real estate, which is struggling, got a series of sops that essentially amount to a bailout of India’s most corrupt industry – unsurprisingly, the index tracking realty stocks zoomed up shortly after the speech.

The BJP has just one more budget to announce before the Lok Sabha elections. I hope that the next budget is not entirely about India’s immediate circumstances. Instead it is a part of a long-term framework. The government should embed thinking about big challenges in the budget process and take a long-term view of India’s economic prospects. For example, technology, climate change, and other disruptive forces will likely impact future job prospects for millions of young people. To evaluate progress on such big issues, the budget process should become a much needed benchmarking exercise.

The government can and should use the budget to foster debates on major policies, promote a results orientation, and evolve thinking on long-term challenges. The time for politically expedient rhetorical flourishes may well be over.

About Shobhit Dixit

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3 comments

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