Will we miss the budget opportunity?

Post-demonetisation, a reversal of the slowdown would require enhanced public spending. It doesn’t appear to be forthcoming

on current and future economic activity and investment plans. So economic activity will definitely decelerate beyond the CSO’S projection.

The revenue projections are also uncertain. The finance minister has used the evidence of an increase in tax revenues in the two months after demonetisation to suggest that real economic activity has not been hit and tax revenues may even increase as a result of this move. This is unrealistic for several reasons.

Direct tax collections in the third quarter of 2016-17 are not a good guide to the total tax collections over the fiscal year. It is likely that large amounts of advance taxes were paid in demonetised notes, which would lead to a peak of such tax collection in these months rather than in the last quarter of the year. Indirect tax collections in the third quarter of 201617 benefited from the 20 per cent increase in global oil prices, since the government had increased the ad valorem customs and excise duty rates during the phase of lower prices, and did not reduce those rates even as global oil prices increased, thereby generating windfall tax gains. The economic slowdown will most likely reduce tax revenues in the last quarter.

This slowdown — induced almost entirely by demonetisation — demands urgent fiscal action. Having caused so much damage to the economy, the government must do something to contain it or at least mitigate its worst effects. This requires significantly enhanced public spending, preferably in activities that generate more employment. Public funding has to be enhanced in ways that revive mass consumption, hit by the cash crunch. A sensible government would significantly increase allocations to social spending, particularly to areas that are not only massively underprovided, but also require particular attention in the wake of the employment and livelihood losses causes by demonetisation. These include food and nutrition, health and education — spending that not only improves the quality of people’s lives but has the added advantage of producing direct and indirect multiplier effects.

If the government were at all truly serious about moving towards some kind of basic income provision (without undermining other public provisions), it would begin by universalising the pensions currently provided only to the BPL population, and increasing the paltry sum of Rs 200 per month to half the minimum wage — as has been demanded for years by the Pension Parishad. If the government were sensitive, it would acknowledge the adverse consequences of its disastrous demonetisation policy on ordinary people, and provide at least some compensation to those who lost jobs and livelihoods — and to the next of kin of those who lost their lives — through no fault of their own, because of this move. But thus far, unfortunately, the government has shown little sign of being sensible, serious or sensitive.

The writer is professor of economics, Jawaharlal Nehru University, Delhi