MODINOMICS. Post-demonetisation, a new normal

With the Narendra Modi government’s efforts to curb corruption, it is not surprising that many of the proposals are aimed at reaping the dividends of the note ban and expanding on efforts to encourage cashless payments.

Coming 84 days after Modi announced scrapping of the old series of ₹500 and ₹1,000 currency notes, the Budget said it was the next logical step in the series of measures by the government to curb black money and prevent tax evasion.

Jaitley was, however, confident that the effects of demonetisation would not spill over into the next year, even though the Economic Survey on Tuesday had forecast a slightly reduced economic growth rate of 6.75-7.5 per cent for 2017-18.

While hoping for a “bigger, cleaner and real GDP”, Jaitley has also bet big on tax collections, post-demonetisation, to help fund the higher public spending and improve the fiscal deficit.

Part of the reason for higher infrastructure spending of ₹3.96 lakh crore was to offset the impact of demonetisation on private sector investments.

The Budget has pegged personal income tax collections to rise by 24.9 per cent to ₹4.41 lakh crore in 2017-18 as against the Budget Estimate of ₹3.53 lakh crore for this fiscal.

Similarly, the growth in direct tax collections is projected at 15.7 per cent in 2017-18 at ₹9.79 lakh crore as against the Budget Estimate of ₹8.46 lakh crore. While the Budget did not share details of the projections’ collections from the Income Disclosure Scheme or the Pradhan Mantri Garib Kisan Yojana, Jaitley said the rate of growth of advance tax in personal income tax in the first three quarters of the current financial is 34.8 per cent.

A number of Budget proposals were aimed at discouraging the dependence on cash and ensuring that people pay up taxes.

In line with the recommendation of the Special Investigation Team, Jaitley proposed to ban cash transactions above ₹3 lakh.

These could have a dampener on real-estate transactions, purchase of jewellery and luxury cars.

The Finance Minister also warned that data mining by the income tax authorities will be used to catch tax evaders.

He announced that the interim recommendations of the Committee of Chief Ministers on digital transactions and another report on digital payments by a panel led by former Finance Secretary Ratan Watal would be taken up for early implementation.

Both have decided to discourage high value cash payments through a banking cash transaction tax or a handling charge.

To clean up the system of political funding, Jaitley has also barred cash donations above ₹2,000 and introduced electoral bonds for high value contributions.

Cash donations to charitable trusts were similarly restricted.

Analysts, however, are keeping their fingers crossed. “Given the experience with the way cash was deposited using multiple accounts in the demonetisation, it will be interesting to see how this will actually be enforced.

Nevertheless, it remains a radical reform as are election bonds,” said Rahul Jain, partner, Nangia and Co.

Simultaneously, to boost digital payments, Jaitley has proposed the setting up a Payment Regulatory Board in the Reserve Bank of India and protecting payees of dishonoured cheques by amending the Negotiable Instruments Act.

Jaitley also promised deployment of cyber security measures to protect digital payments.

“A shift to digital payments has huge benefits for the common man,” he noted, while proposing two incentive schemes to use the BHIM app as well as a merchant version of Aadhaar Pay. The government also plans to launch a Mission with a target of 2,500 crore digital transactions for 2017-18 through UPI, USSD, Aadhaar Pay, IMPS and debit cards.

Banks have also targeted introducing 10 lakh additional point of sale terminals by March 2017, and will be encouraged to introduce 20 lakh Aadhaar-based PoS by September 2017.

To this end, the Budget has abolished excise and customs duties on manufacture and components of miniature PoS card reader and micro ATMs. Similarly, digital payment infrastructure of the government will also be encouraged.

Apart from the stick, Jaitley also unveiled carrots for the middle-class and small and medium enterprises that were the most hit by demonetisation and whose consumption demand needs to be perked up.

Lowering the burden on small taxpayers, he halved the income tax rate for annual income between ₹2.5 lakh and ₹5 lakh from the existing 10 per cent to 5 per cent and a single page return form.

But how far the Budget manages to offset the impact of demonetisation will be clear later in the year.

“Even as the Budget assumes the impact of demonetisation to be transitory, it does clearly cater to some sectors that have been impacted by the “cash-ban” — rural, MSMEs and low income group of individuals,” said Abheek Barua, Chief Economist, HDFC Bank.

Similarly, William Foster, Vice President, Sovereign Risk Group, Moody’s Investors Service said the agency will monitor revenue collection as an indication of policy effectiveness.

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