Demonetization As An Outrider To Fiscal Consolidation

Despite demonetization as an out-of-box fiscal consolidation measure, Indian government must utilise alternative measures to address fiscal deficit.

At the end of another financial year, India faces a very pertinent question: Was demonetization precisely executed as a precursor for achieving fiscal consolidation? In other words, was it enough?

Following the annual budget of 2017-18, Arun Jaitley pegs for a fiscal deficit target of 3.2%, which seems reasonable, considering alternate measures aimed at preventing external consumption. The demonetization drive has monetized banks to help the government realise higher tax revenues, a step to prevent reduced spending. Even if it wasn’t, the drive assuredly provided a valuable impetus to reduce fiscal deficit. The anticipated revenue collection that demonetization offered through taxing the banked but unaccountable black money, is a unique way of increasing tax collection and reducing fiscal deficit, without disturbing or curtailing essential social expenditures.

The government has been conservatively successful in containing inflation over the last year, and demonetization added to significant revenue collection with the most radical financial reform. Demonetization’s timing before the budget, subsequent remonetisation, and announcing fiscal deficit targets through budgetary allocations, all adds to the interpretation that demonetization was a timely and opportunistic fiscal consolidation measure. At a time when there is growing ambiguity in private investments and government expenditure, realising tax revenues from a massive surge in cash deposits triggered by demonetization is an ideal measure to achieve fiscal deficit reduction targets. Thus, demonetization has been a surprise tool of reducing fiscal deficit. This allows leniency, broad based utilisation, and tight control of other measures that could trigger economic derailment.

There were some other takeaways that reflected the demonetization-drive’s economic outcomes. A reformed tax structure by reducing corporate tax rates of SME’s to 25%, anticipating higher income declaration and increase in SME registration, and reduced personal income tax in the lowest bracket of 2.5 lacs-5 lacs to 5%, were some significant additions. In addition, the budget announced disinvestment targets of INR 72,500 crore. These when added, look towards precipitate fiscal deficit reduction.

However, since the agricultural income accounting for approximately 50% employment remains untaxed, the inquisition on tax collection remains a mystery. Higher realisation of tax revenues from existent taxpayers shall remain a challenge too. Interestingly, the government has found itself in a spot when it announced the number of people declaring personal income tax; only 3.65 crore Indians out of 125 crore pay taxes, only 24.4 lakh people declared taxable income above 10 lakh, and yet the number of luxury car sales have been unreservedly growing since the last five years. Bringing tax evaders into the tax-net will irrefutably be the biggest challenge. This particular measure to reduce fiscal deficit must be executed aggressively than giving more powers to IT commissioners to harass existent and honest taxpayers.

On the flip side, demonetization has been a dichotomous weapon. There are industries that have suffered immensely, and there are individuals who still decamped. It requires huge backing of measures such as cutting down of subsidies, widening the tax net, walking the talk on disinvestments, and continuously recovering domestically and internationally stashed black money. All measures of fiscal consolidation must potentially utilised in their respective capacities, in various permutations.

Be the first to comment

Leave a Reply

Your email address will not be published.


*