Budget blues

In the run up to the 2017-18 budget and five State Assembly elections, the Centre is putting a brave face on the political and economic impact of demonetization, as if it were almost a non-event. The political effect will be known on March 11. But the economic impact, according to economists, is a matter for great worry.  There are no reliable data to assess accurately the GDP base for the next fiscal.  And it is on this that other calculations are made. One consequence of this uncertainty is obvious. The Finance Minister may not correctly estimate either revenue or expenditure. His business-as-usual attitude may lead him to underestimate expenditure and therefore the extent of borrowing he will be forced to have recourse to.

An RBI business sentiment survey, based on data collected from over 1200 companies, for the first quarter of the calendar year, has indicated a further fall in demand. This raises serious doubts about the Government’s optimism that as remonetization picks up, demand will also pick up. This may be one more of the Finance Minister’s wishful thinking. In fact demonetization has only intensified demand recession. With no cash in their pockets, everybody – from the man-in-the-street consumer to the owners of small businesses and enterprises – is staring at an uncertain future. Many small businesses have experienced sharp fall in their sales. In turn this has forced them to retrench staff. Several big industries like tea and jute have been affected as they don’t have money to pay weekly salaries to their workers.

Politically, Modi’s November 8 decision has caused great distress to businessmen and traders who constitute the core constituency of the BJP. Reports from poll-bound States like Uttar Pradesh suggest that a large number of traditional BJP voters have decided not to vote for it this election, even if all of them have not made up their mind as to whom they will vote for. A similar situation had arisen 40 years ago in 1977, when Indira Gandhi decided to end the Emergency and hold elections. Many traditional Congress voters had said then they would not vote for the Congress. What happened next is history.

The worst thing that demonetization has done is to destroy the credibility of the RBI which was treated by the Prime Minister as an extension of the Finance Ministry. Like the CBI, the RBI became another ‘caged parrot’ whose job was to say ‘yes’ to whatever the Government said. The long-term effect of discrediting the country’s central bank will have far-reaching consequences which may not have to be faced by the present government.

Monday, 30 January, 2017