Narendra Modi has often claimed that
elevation to the prime minister’s office in New Delhi was historic and
inevitable. Last November, he attempted to consolidate his position in Indian
history by making a pre-emptive announcement that invalidated Rs.500 and
Rs.1,000-rupee notes valued at Rs.15.44 lakh crore or 86 percent of currency in
the Indian economy. To counter the rain of criticism that greeted this diktat,
Modi and his band of propagandists fielded cheerleaders — journalists,
academicians, publicists and businessmen — to obscure and obfuscate the
absolute mayhem the arbitrary announcement caused.
In this context, it would be instructive
to examine the consequences of demonetisation.
• It crippled informal sectors of the
economy in which most dealings are in cash. Contrary to government propaganda,
‘black money transactions’ are simple currency exchanges outside the banking
system. Reserve Bank and government of India data (2011-2015) indicate the cash
economy contributes mightily to the national economy: 45 percent of gross value
added; 40 percent of capital formation and nearly 67 percent of investible
funds.
• A study by the Confederation of Indian
Industry (CII) estimates that prime minister Modi’s demonetisation diktat
knocked the stuffing out of the informal economy which employs more than 90
percent of the country’s workforce and generates almost 50 percent of national
income.
• According to CIBIL, a credit rating
agency, the formal sector of the economy was also badly singed. It reported a
30 percent decline in overall credit offtake with a 60 percent nosedive in
November-December 2016.
• CIBIL also noted that distress was
acute in rural and semi-urban areas and within the lower middle class, citing a
dramatic decline of 40 percent in loans for automotive two-wheeled vehicles.
• Union labour ministry data indicates a
20 percent increase in demand for unemployment relief under MNREGA, the welfare
scheme for the poorest. This suggests a reverse flow of migration from city to
country.
• In the country’s eight largest cities,
the real-estate sector reported a decline of 44 per cent in housing sales, a
16-year low.
• The All India Manufacturers Association
which represents small and medium enterprises reported a 50 percent loss in
revenue and a 35 percent cut-back in employment.
• According to estimates of economists at
the National Institute of Public Finance and Policy, national GDP growth rate
is likely to plunge from 7.56 percent in 2015-16 to 6.1 percent in 2016-17.
Against this backdrop, the prime intent
of the Union Budget 2017-18 presented to Parliament on February 1, is a
cover-up to obfuscate the impact of demonetisation on the economy which was
already slowing since 2014. When awareness dawned that the ill-conceived hasty
demonetisation stunt would backfire, the Modi government became unhinged and
unclear about its response. The prime minister’s justification was a weird
analogy that just as surgery is best performed on a healthy patient, the
currency ban was a timely move against black money because the economy was in
good health.
The Union Budget 2017-18 therefore
betrays persistence of gimmickry: the presentation date was advanced to
circumvent Election Commission restrictions on state-specific proposals; the
railway budget was merged into the main budget and meaningless tax concessions
were announced for the organised sector. A classic example of playing to the
gallery was the scrapping of the Foreign Investment Promotion Board whose role
has already been severely circumscribed to the point that less than 20 percent
of all proposals are cleared by it.
The budget could have acknowledged that
the currency ban made it impossible to predict revenue of the next fiscal year.
It could have ignored the spending limits imposed by the Fiscal Responsibility
and Budget Management Act of 2003 to boost economic growth. The government
could have announced major cuts in indirect taxes as these levies have a
cascading impact on the economy and substantial cuts would have helped hapless
citizens whose livelihoods are threatened by the demonetisation diktat.
Instead, the finance minister played around with rejigging direct tax rates and
slabs and offered hollow concessions including tax rebates to small and medium
enterprises.
In the final analysis, Modi’s budget
simply continues the disinformation campaign surrounding the demonetisation
bloomer. Initially, he sought to portray it as a “surgical strike” on black
money. When it became clear that it had no impact on unaccounted cash, he
billed it as a “masterstroke” against counterfeit currency and terror funding.
When that too proved inadequate, he positioned it as a strike against the rich
on behalf of the poor. When even that didn’t catch on considering the credible
“suit-boot sarkar” charge made against him by the opposition, he simply dropped
the subject. Budget 2017-18 reflects this.
