In this context, it would be instructive to examine the consequences of demonetisation.
• It crippled informal sectors of the economy in which most dealings are in cash. Contrary to government propaganda, ‘black money transactions’ are simple currency exchanges outside the banking system. Reserve Bank and government of India data (2011-2015) indicate the cash economy contributes mightily to the national economy: 45 percent of gross value added; 40 percent of capital formation and nearly 67 percent of investible funds.
• A study by the Confederation of Indian Industry (CII) estimates that prime minister Modi’s demonetisation diktat knocked the stuffing out of the informal economy which employs more than 90 percent of the country’s workforce and generates almost 50 percent of national income.
• According to CIBIL, a credit rating agency, the formal sector of the economy was also badly singed. It reported a 30 percent decline in overall credit offtake with a 60 percent nosedive in November-December 2016.
• CIBIL also noted that distress was acute in rural and semi-urban areas and within the lower middle class, citing a dramatic decline of 40 percent in loans for automotive two-wheeled vehicles.
• Union labour ministry data indicates a 20 percent increase in demand for unemployment relief under MNREGA, the welfare scheme for the poorest. This suggests a reverse flow of migration from city to country.
• In the country’s eight largest cities, the real-estate sector reported a decline of 44 per cent in housing sales, a 16-year low.
• The All India Manufacturers Association which represents small and medium enterprises reported a 50 percent loss in revenue and a 35 percent cut-back in employment.
• According to estimates of economists at the National Institute of Public Finance and Policy, national GDP growth rate is likely to plunge from 7.56 percent in 2015-16 to 6.1 percent in 2016-17.
Against this backdrop, the prime intent of the Union Budget 2017-18 presented to Parliament on February 1, is a cover-up to obfuscate the impact of demonetisation on the economy which was already slowing since 2014. When awareness dawned that the ill-conceived hasty demonetisation stunt would backfire, the Modi government became unhinged and unclear about its response. The prime minister’s justification was a weird analogy that just as surgery is best performed on a healthy patient, the currency ban was a timely move against black money because the economy was in good health.
The Union Budget 2017-18 therefore betrays persistence of gimmickry: the presentation date was advanced to circumvent Election Commission restrictions on state-specific proposals; the railway budget was merged into the main budget and meaningless tax concessions were announced for the organised sector. A classic example of playing to the gallery was the scrapping of the Foreign Investment Promotion Board whose role has already been severely circumscribed to the point that less than 20 percent of all proposals are cleared by it.
The budget could have acknowledged that the currency ban made it impossible to predict revenue of the next fiscal year. It could have ignored the spending limits imposed by the Fiscal Responsibility and Budget Management Act of 2003 to boost economic growth. The government could have announced major cuts in indirect taxes as these levies have a cascading impact on the economy and substantial cuts would have helped hapless citizens whose livelihoods are threatened by the demonetisation diktat. Instead, the finance minister played around with rejigging direct tax rates and slabs and offered hollow concessions including tax rebates to small and medium enterprises.
In the final analysis, Modi’s budget simply continues the disinformation campaign surrounding the demonetisation bloomer. Initially, he sought to portray it as a “surgical strike” on black money. When it became clear that it had no impact on unaccounted cash, he billed it as a “masterstroke” against counterfeit currency and terror funding. When that too proved inadequate, he positioned it as a strike against the rich on behalf of the poor. When even that didn’t catch on considering the credible “suit-boot sarkar” charge made against him by the opposition, he simply dropped the subject. Budget 2017-18 reflects this.
(Rajiv Desai is president of Comma Consulting and a well-known Delhi-based columnist)