Is India’s War on Cash Paying Off?
Central bank says it cut borrowing plan after reviewing cash position
Indian people lined up outside the Reserve Bank of India in Mumbai to deposit old rupee notes in late December.
Indian people lined up outside the Reserve Bank of India in Mumbai to deposit old rupee notes in late December. Photo: European Pressphoto Agency
By
Anant Vijay Kala
Updated Jan. 4, 2017 2:36 p.m. ET
India lowered its borrowing plan for the year ending March 31 by 4.2%, in a sign that the government’s crackdown on tax evaders is helping to increase New Delhi’s coffers.
The government says it plans to cut the amount it borrows by 180 billion rupees ($2.64 billion) from its earlier estimate of about 4.25 trillion rupees.
Prime Minister Narendra Modi in November announced a plan to withdraw and replace 500- and 1,000-rupee notes in an effort to cut tax evasion, terrorism and government corruption.
The government wasn’t more specific about India’s cash flow, but some bond-market analysts said the plan is helping to catch tax evaders, make them pay and increase government revenue.
In India, bonds are issued by the government, but the Reserve Bank of India conducts the sales processes, acting as a fund manager for the government. The RBI and the government said they cut the borrowing plan “after reviewing the cash position.”
As people lined up at banks to deposit wads of notes in November, the government also offered a tax amnesty on unreported wealth. Indians can avoid prosecution by paying half of the amount in tax and penalties, while depositing another quarter as an interest-free loan with the government for four years.
The government hasn’t revealed how much money has been deposited so far, and the amnesty program is open until March. But economists say revenue could rise to several billions of dollars, which would be welcome bounty for the government.
“The income-disclosure scheme was not budgeted. That could have provided an additional push” for revenue, said Madan Sabnavis, chief economist at Care Ratings. Overall tax collection has been rising since the economy strengthened in early 2016, which has also helped the government cut borrowing.
The currency decision created a cash shortage that sparked widespread disruption to the economy, affecting payments from factories to farm-supply chains. On Wednesday, a gauge of services activity showed a second straight monthly contraction in December, as new orders fell to their weakest level in more than three years.
Economists widely predict that growth in India’s economy, which has held steady at more than 7% in recent years, could slow to about 6% or even lower if new currency isn’t pumped in quickly to end the shortage.
Last week, while countering criticism that the economy was suffering from the war on cash, Finance Minister Arun Jaitley said tax figures told a different story.
He said income tax revenue rose 14.4% through Dec. 19, although he didn’t specify if he meant for the fiscal year or thus far in the demonetization program. Indirect taxes—including excise, and custom duties and service taxes—also rose a collective 26.2% up to Nov. 30, he said.
“What comes into the banking system gets identified with the person and therefore its impact on taxation and revenue collection is already being seen,” Mr. Jaitley said.
The fact that other important sources of government revenue have been lagging indicate that the decision to cut borrowing is a result of the increased tax revenue, said Soumyajit Niyogi, an associate director of credit and market research at India Ratings & Research.
“It’s because of the tax amnesty scheme or the demonetization that the government would be expecting to get some bonanza through tax penalties,” Mr. Niyogi said.
The government has raised 214.32 billion rupees with stake sales of state-run companies this financial year, which was less than half of the full-year target of 565 billion rupees. With just a quarter left in the fiscal year, some economists say they believe New Delhi will miss its disinvestment revenue target by a significant margin.
Write to Anant Vijay Kala at anant.kala@wsj.com
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