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Demonetisation hits budget preparations
December 11, 2016
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NEW DELHI: Indian 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.

Finance Minister Arun Jaitley is expected to present the annual budget for 2017-18 on February 1.

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 central bank should have taken more steps to ease the pain of ordinary people.

“We still have to start work on the budget.”

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.

The government is likely to miss its annual target of raising 565 billion Indian rupees ($8.4 billion) through the sale of stakes in companies by a wide margin due to uncertainty in the markets, said the official. The government has so far raised less than half of the target for the whole fiscal year.

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 ($5.18 billion) this year.

“We are facing very uncertain times,” said Bhanumurthy. “The government should weigh the impact of demonetisation on growth and revenue.”

Another finance ministry official said economic growth for the current fiscal year to March 2017 could fall below the central bank’s revised estimate of 7.1 per cent, putting pressure on fiscal deficit targets.

The federal government has partially deferred a hike in wages of its 10 million employees and pensioners to cut its spending bill.


Arun Jaitley announced incentives ranging from 0.75 per cent to 10 per cent on retail purchase of products like petrol, diesel and insurance products from state-run companies to encourage digital, cashless transactions. This is expected to lead to a cashless economy in the future.

Since coming to power in 2014, Modi has pledged to crack down on so-called black money with new measures including 10-year jail terms for evaders.

“The incentive scheme has the potential of shifting at least 30 per cent more customers to digital means which will further reduce the cash requirement of nearly 2 trillion rupees ($29.69 billion) a year at the petrol pumps,” Jaitley said.


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