Demonetisation Disrupts Budget Preparations: Govt Reports


New Delhi: Prime Minister Narendra Modi’s surprise decision to scrap high-value banknotes has upset preparations for next year’s budget because of the resulting disruption to growth, revenues and asset sales, two government sources said.

Modi scrapped 500-rupee and 1,000-rupee banknotes on November 8 in a bid to flush out cash earned through illegal activities, or earned legally but never disclosed to the taxman. Officials fear the move will slow economic activity for much longer than originally expected, as millions of people continue to queue at banks and ATMs for cash and companies struggle to pay wages and suppliers.

“We had thought the demonetisation will be a game changer,” said one official, who has direct knowledge of budget preparations, adding the Reserve Bank of India should have taken more steps to ease the pain of ordinary people. “We still have to start work on the budget.”

Finance Minister Arun Jaitley is expected to present the annual budget for 2017/18 on February 1. The official said the cash crunch had hit sectors like construction, agriculture and auto makers, hurting tax receipts and complicating the government’s asset divestment programme.

Two-wheeler and commercial vehicle sales declined by over 10 per cent in November from a year ago, with weakness in the retail, gems and jewellery sectors also impacting factory gate duty receipts.

N.R. Bhanumurthy, an economist at National Institute of Public Finance and Policy (NIPFP), a government-funded think tank, said revenue collections could fall by up to 350 billion rupees this year. “We are facing very uncertain times,” said Bhanumurthy. “The government should weigh the impact of demonetisation on growth and revenue.”

The Reserve Bank of India has dashed hopes of a windfall of nearly $15 billion based on expectations that up to 30 per cent of the “black cash” would expire worthless, enabling it to pay a one-off dividend to the government.