Emerging Strategic Directions of the Union Government in the Context of the Monetary Policies and Budget 2017

11 Jan 2017

The new Government headed by Mr Narendra Modi swept the Parliamentary polls in 2014 and took over the Government in Delhi. A totally new set up took over the roles in the Central Government covering the various Ministries and in the last couple of years even the bureaucracy went through a revamping with new faces and a fresh approach to governance.

The Prime Minister had mentioned in his election speeches that he would focus on bringing about a change in the different spheres covering industry, agriculture and the basic principles of governance. This also covered a promise of eradicating the black money problem in the national economy as well as bringing about a radical change in all operating areas.

True to the above promise, the Government has recently demonetized the Rs.500/- and Rs.1000/- notes and is actively trying to digitize the economy. Also, the Government is working towards changing all working areas and assumptions by merging the ‘Railway Budget’ with the ‘General Budget’ and preponing the Budget presentation to the beginning of February for ensuring that all Budget workings are initiated and enforced with effect from the beginning of the financial year i.e. 1st April, 2017. This will also result in avoiding the vote-onaccount requirement since earlier the budget was being passed in May/June resulting in non-availability of funds for running the various Government Departments between April and May/June.

It is obvious from the above that a breath of freshness is coming in for the various activities of the Government which has not happened in the past. However, the operating problems in the effective implementation of the demonetization policy are still continuing and it is expected that the said problems would get over in the next few months so that the economy can get kick-started from the set back in November. It is worth mentioning that the demonetization strategy had to be covered in a ‘veil of secrecy’ for the obvious reason that issues relating to terrorist funding, counterfeit currency and fall-outs of the black money economy were sought to be addressed.

The Central Budget has now assumed a very critical role in respect of the direction that the Government wishes to provide for unshackling of the Indian economy to move into a higher growth trajectory in the next few years. For instance, the proposed introduction of the National GST is now virtually certain which is expected to reduce the complications in the realm of indirect taxes, so that the multiplicity of levies like excise duty, service tax and local taxes are replaced by a new model of sales tax which is expected to result in improving the complications and disputes. In fact, the high level of computerization in the designing of GST network will by itself result in cutting down the tax-on-tax phenomenon and help in seamless transition for the various products and services in the country. This also will help in ensuring that all transactions are captured for the consequential adjustment of the taxes paid at the earlier levels and this in turn will definitely result in the reduction of the black economy. Consequently, the seeds will be sown for improvement in the GDP, which is expected to go up by 1-2 per cent. The Government has also announced the focus on the ‘Make-in-India’ concept which should also aid in bringing back manufacturing operations to the country. A related suggestion is to change the motto from ‘Make-in-India’ to ‘Made-in-India’. This change would result in enhancing the branding of Indian manufacturing as an inherently valuable concept with focus on quality which by itself would result in bringing back more manufacturing to India.

In respect of Direct Taxes, demonetization has on its own created some operating problems since India has been historically a cash economy and the said Rs.500 and Rs.1000/- notes accounted for over 85 per cent of the cash in the system i.e. around Rs.15 lakh crore. Therefore, the replacement of the said currencies by new notes will take some time. Parallely, the Government has also instituted a number of measures for digitization of the transactions to the maximum extent possible and this will definitely help in the long run. The Government has started providing incentives digital payments so that all transactions are brought into the official channels.

A number of economists have opined that the return of the demonetized Rs.500/1000 notes should be less than the Rs.15 lakh crores currency in circulation on a total basis and this would help in RBI extinguishing the liability for the said shortfall, which in turn could be used to give a special dividend to the Government. As per information available till 10th December, 2016, Rs.12.44 lakh crores of the demonetized currency have already been returned back to the RBI. However, this methodology for determination of the success or failure of demonetization may not be the ideal formula. In fact, the Government has already brought about a new Taxation Amendment Law for providing a window for a new Income Disclosure Scheme. This will help in getting back the black money into the official system after payment of a higher rate of taxes and penalty. This appears to be a very good move to ensure that the unreported cash economy can smoothly move in to the main economy and therefore, the ideal position would be one in which the entire Rs.15 lakh crore of Rs.500/Rs.1000 currency could move into the official channels. The consequential taxes would by itself result in generating additional revenue for the Government and the black currency would start contributing to the official economy in terms of investments and growth. Further, the individual banks would get additional liquidity which would by itself help in their ability to give loans to all sectors at a lower interest rate for growth and inflation would also come down.

The Black Economy is actually not restricted only to the currency form. It also exists in respect of gold and real estate in addition to foreign moneys stashed abroad. It is imperative that the Government takes further measures to address the above areas, so that there are no gaps in the administration of the said problem. It may be noted that the Government has already brought about the new laws and regulations in respect of Benami Transactions (Prohibition) Amendment Act, 2016 and Insolvency and Bankruptcy Code, 2016 and it is earnestly hoped that the menace of the Black Economy gets finally addressed by this multi-pronged approach.

The above mentioned strategic measures initiated by the Central Government should now be strengthened by new measures in the coming Budget for 2017. It is suggested that the Government introduces special measures for kick starting the economy. This could take the form of a stimulus package for 2017-18 covering various sectors of the national economy as was done in 2008-09. However, this time it could include reduced rates of Indirect Taxes, whether in the form of GST or otherwise depending on the final introduction of the said GST Law. Other measures would include lower rates of interest on loans for various critical areas like auto sector, agriculture and investments in infrastructure. There could also be in the form of special subsidies in the important areas of the economy. For Direct Taxes, the Government has already mentioned that incentives would be reduced and it would be in the form of investment-linked deductions as opposed to profit- linked deductions for critical infrastructural areas like power (including wind and solar power) roads, highways, ports etc.. This will create more purchasing power for individuals and availability of increased funds for investment in hands of Corporates. Moreover, with the broadening and expansion of the tax base, the tax rates could be brought down for both individuals and corporates, which would incentivise and recharge the national economy.

The Government has already initiated various steps in the last couple of years by setting up the Easwar Committee for simplification of Income Tax Laws, the Ashok Lahiri Committee for reduction of operating issues in Income Tax, the Standing Committee on TDS for ensuring the smooth administration of tax deduction at source, extensive computerization in respect of return filing, processing, issue of circulars by CBDT for reduction of tax disputes etc.

It is expected that all the above measures would help in bringing about greater growth and buoyancy in the national economy and help in unleashing the country in the global stage so that India can take its rightful place in the world.