The demonetisation programme implemented between November 8 and December 31 had several objectives, with goalposts being changed quickly as the government realised its system could be easily gamed.
What started off as a war on black money eventually got diluted into a quasi-philosophical goal of pushing India into becoming a digital economy. Hence, we began by expecting something like Rs 5 lakh crore to be extinguished from the system, but as old notes were deposited into bank accounts at a frenetic pace, the figure was dialled down to Rs 2 lakh crore along the way.
However, as it became known that a majority of the demonetised currency would come back, the government gave another chance to the holders of black money by announcing another amnesty scheme. While no numbers have been spoken of for the accruals to the government from this scheme, there would be a delta in the earnings for the government which will provide a buffer for the coming year.
There are two flows of income for the government, one direct and the other slightly futuristic, the latter of which will depend on the efficacy of India’s income tax department. The direct flow of income for the government will be the declarations made in the second income disclosure (IDS-II) scheme.
It has been announced that the disclosures this time will be taxed at 50% just like the first scheme which ended in September 2016. In case one does not come clean but instead tries to dodge the tax authorities, the possibility of being identified would invite a penalty of 85%, which would come after the IDS-II. There have been several reports of black money being impounded in old and new notes over the last 50 days. What could be the amount that we could be looking at?
The first income disclosure scheme (IDS-I) had disclosures of roughly Rs 60,000 crore, which will yield Rs 30,000 crore as tax income for the government. While it may be hoped that there will be some big ticket disclosures, it is more likely that it would be smaller amounts that will be declared. Those with large amounts would probably have stashed away their wealth in land, gold and forex. Therefore, the amount coming through the IDS-II could at best be between Rs 1-2 lakh crore, giving an income of around Rs 1 lakh crore.
The other source of income would be futuristic whereby some portion of the old notes deposited – this portion can hitherto be called ‘undetected black money’ – will now enter the taxable steam and yield an increase in tax revenue at the prevailing tax rate of 33% which can be discounted over the years.
How can we look at these numbers? The government has already lowered its borrowing programme for the year by around Rs 6,000 crore. This means that it expects either income to be buoyant or expenditure to be lower. It appears that it is more likely to be the latter as expenditure cuts appear to have been accepted across the board.
Also, it should be recognised that while tax revenue has been fairly buoyant for the government, there have been slippages in disinvestment and spectrum sale. This additional revenue from IDS-I, if accrued in FY 17, can compensate for this deficit.
But the gains from the IDS-II are more likely to accrue in the next year as people have been given time till March end to declare their false income, in which case the amount may come next year. This means that there will be more room for manoeuvrability for the government in this year’s Budget.
Will this be a large number? One cannot tell, but the government will have some idea about what this number could be while finalising the numbers for this Budget. If it is around Rs 1 lakh crore then it would be significant as this will amount to almost 20% of the fiscal deficit. The committee on revising the fiscal responsibility and budget management norms would also be pertinent here as the roadmap for the fiscal deficit would be known in the course of time. There are some options on what could be done with this money.
First, the government could add this amount to the Budget and spend on infrastructure by earmarking the same. In this modality, the budgetary numbers will remain unchanged with higher allocations matched by spending.
Alternatively, the government could get realistic when drawing the Budget and not overstate disinvestment or spectrum sale realisations in the revenue heads, which has become a bad habit. These additional proceeds can be used to balance the Budget with the surplus being ploughed into infrastructure. In this case also, the budgetary deficits will remain unchanged.
Third, it should be remembered that the government has expenditure commitments for next year in the form of pay commission arrears as well as revised structures. Add to this the announcements that may be made this time, coming as the Budget does just before important state elections, and there could be a few more programmes for lower income groups. This may not be high as the government has preferred to reallocate funds in the last two years across programmes rather than increase the allocation.
Another possibility is in the area of accommodating higher oil prices. Oil prices have been increasing and there would be pressure on the subsidy levels in FY 18. Last year, retail prices were retained despite low crude prices as taxes were increased and the revenue flowed to the government. Hence this can be a buffer against this eventuality.
Fifth, with the GST around the corner where states have to get compensated, while it will ultimately be a zero-sum game until the systems are in place, a buffer may have to be created to address these demands and hence could be used for the same.
Another claimant for these additional funds would interestingly be the common man. It was stated earlier during the November-December period that the government wanted to transfer all the black money that was identified back to the poor through their Jan Dhan accounts. Hence, this money could be used to fund any number of redistribution schemes.
But two developments have complicated the issue. First, the Jan Dhan accounts have been seen to have been misused for converting old notes to deposits and hence identification would be a horrendous task. In fact, the hunt is ongoing. Secondly, with nearly all of the demonetised notes coming back into the system, there may not be any missing money. Hence, the onus for carrying out this task comes back on the use of the revenue receipts from taxation on the IDS-I and IDS-II. Hence, there would be a moral objective to satisfy.
The formulation of the Budget for FY 18 will definitely be easier as there would be these incremental collections from disclosures. It will be interesting to see how these funds are deployed and while the Budget may not specifically give the number involved, the higher tax receipts would give an idea.
Carrying various buffers would be pragmatic while spending the same on capital projects could speed up growth which has witnessed a setback post demonetisation. Given the path followed by the government in the last two years, one could be very confident that these funds would be used with the prudence which is what cogent fiscal management is all about.
Madan Sabnavis is chief economist at CARE Ratings.