How Demonetisation & Other Schemes Will Boost Union Budget 2017?

How Demonetisation and Other Schemes are Going to Boost Union Budget 2017?

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How Demonetisation and Other Schemes are Going to Boost Union Budget 2017?

Will Demonetisation Boost Budget 2017

Government launched its demonetisation scheme on November 8 last year with the several objectives. A major objective was to demolish parallel economy. However, what started off as a war on black money eventually became a movement to make India a digital economy.

In the beginning, it was expected that somewhere around Rs. 5 lakh crores will be vanished from the system, but as people scrambled to deposit their old notes into the bank accounts, the estimate was revised down to Rs. 2 lakh crores.

However, as the time passed, it became obvious that a large portion of the demonetised currency would come back. So, 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, government’s budget will certainly get a boost.

What are income sources?

There are two flows of income for the government, one direct and the other slightly futuristic, the latter of which will depend on the efficiency 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% which is 5% higher than 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. 75,000 crores, which will yield Rs. 33,750 crores as tax income for the government. While it may be hoped that there will be some disclosures in the second scheme, 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 F.Y. 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.

Impact on Budget 

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 F.Y. 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.

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