The demonetisation move, resulting in a disturbance to growth and asset sales, has upset the preparations for 2017’s Budget Planning. A very high proportion of the demonetised currencies came back into banking channels, far more than what was initially expected. Finance Minister Arun Jaitley is expected to present the annual budget for 2017/18 on February 1, 2017.
N.R. Bhanumurthy, an economist at the government-funded think tank National Institute of Public Finance and Policy (NIPFP), said revenue collections could fall by up to 350 billion rupees ($5.18 billion) this year. Certain officials fear the move will slowdown the economic activities for much longer than expected, as millions of people continue to queue at banks and ATMs for cash and companies struggle to pay daily wages even though the situation has eased somewhat.
The demonetisation drive has arguably hit a variety of sectors like auto, agriculture and construction. The federal government has partially deferred a hike in wages of its 10 million employees and pensioners to cut its spending bill.
The Reserve Bank of India has plunged the hope of an unexpected gains of nearly $15 billion based on expectations that up to 30% of the “black cash” may expire worthless, enabling it to pay a one-off dividend to the government.
Arvind Panagariya, Vice-Chairman, National Institution for Transforming India (NITI) Aayog, in an effort to maintain decorum around the country, mentioned that it is not too unusual for governments to change or update laws in response to the changing times. One fourth of the declared black money is slated to go to Pradhan Mantri Garib Kalyan Yojana, 50% to the treasury. This will result in increased social expenditure, according to Mr. Panagariya.
The central bank also emphasised that the decision to withdraw the legal tender status of the ₹500 and ₹1,000 notes with effect from November 9, 2016 had not been a sudden one. The move had been made after detailed contemplation. From November 1o to December 5, 2016, the RBI has supplied to the public banknotes of various denominations worth ₹3.81 lakh crore, which is more than the supply in the whole of last three years.
In the latest announcements made around the demonetisation drive, Prime Minister Narendra Modi reiterated that ₹500 and ₹1000 notes would not be accepted at railway ticket counters, ticket counters of government-run buses, for making payments for railway catering services and for purchasing suburban and metro rail services from December 10, 2016.
The exemptions that remain till December 15, 2016 include payments at Government hospitals, pharmacies, consumer cooperative stores, government-run milk booths and at crematoria and burial grounds. Other exemptions include payments for LPG gas cylinders, tickets for any monument maintained by the Archaeological Survey of India, any fees, charges, taxes or penalties payable to the government, utility payments, payments for the purchase of seeds from government outlets, government school fees up to a limit of ₹2,000 a student, government college fees, and payments for prepaid mobile top-up up to ₹500 per top-up.
The Budget announcements will come right before the five states, with a population of around 250 million, go to polls. The Budget is slated to be early this time. Tax incentives in the Budget are being seen as a trade-off against the widespread disillusionment after the demonetisation. There could be sops, after the pain.
Follow this blog for the more updates!