Impact of Demonetisation on Union Budget 2017 Preparation
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Demonetisation : Effects on Union Budget 2017 Preparation

Government’s preparation for Union Budget 2017-18 is nearing its climax. Expectations are being raised, predictions are being made. However, any hope and prediction for this budget cannot be made without analysing the impact of demonetisation on it. Demonetisation has affected several industries, and its financial impact has mostly been adverse for them. Communications, construction, real estate, transport, retail trade, hospitality and several other allied sectors have been affected by demonetisation. Government officials have reported that revenue collection in the form of taxes has dipped post demonetisation came into effect. The culmination of all this will be visible in the Union Budget 2017.

Here are the adverse effects of demonetisation on the economy which are affecting government’s budget preparation:

  • Two-wheeler and commercial vehicle segment witnessed a decline in sales by over 10% in November compared to the same period a year ago.
  • Retail, gems and jewellery sectors showed a poor performance which affected the collection of factory gate duty tax negatively.
  • The government is very likely to miss its revenue target of Rs. 56,500 crores through the sale of stakes in companies by a big margin.
  • Commercial tax collection which was Rs. 1,267 crores in October, came down to Rs. 1,167 crores in November and further fell to Rs. 1,094 crores in December.
  • The government had set a revenue target of Rs. 3,300 crores to be collected through excise duty. However, officials have predicted that it is most likely to miss it due to fall in liquor consumption post demonetisation.
  • Similarly, Mines Department is very likely going to miss its revenue target of Rs. 6,700 crores for current Fiscal Year by a huge margin as it has collected only Rs. 2,900 crores by the end of December.
  • A collection of own tax revenue fell by 11% in December and is expected to fall further in January and February.
  • Infrastructure and social sector have also not been immune to the effects of demonetisation. Dip in revenue generation will delay several projects.
  • Ongoing Fiscal Year’s economic growth rate is expected to go below the previously revised estimate of 7.1%.
  • The government has also partially postponed its plan to hike wages of its 10 million employees and pensioners to bring down its expenses.
  • The government has estimated that only 5-10 percent of the cash will expire worthless which has raised questions over the entire exercise which was billed as an attack on the parallel economy.

[ Read: 11 demonetization Myths – Debunked! ]

Demonetisation hasn’t completely dwindled government’s finances. There is a brighter side too. Here is what economy has gained financially from it:

  • Demonetisation and other related efforts from the government have resulted in overall increased tax collection during the Financial Year.
  • VAT and CST collection till December has been reported to be Rs. 8,759 crores for the ongoing Fiscal Year which is 13.3% higher than the collection during the same period last year.
  • The fiscal deficit is lying at 2% which is comfortably below the permissible limit of 3.5%.
  • Another positive effect observed has been in the state debt to GSDP ratio which is currently at 14% is well below the permissible limit of 25%.

Despite the short-term upheavals caused by demonetisation in the economy, its long-term picture still promises to be bright. It is so because demonetisation is not just about denting parallel economy, it is merely a stepping stone in government’s grand plan to digitise the nation. So, in future, we can expect several similar steps from the government.

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Niteesh Singh
Niteesh Singh
Niteesh is a Tax Researcher and Content Lead at H&R Block (India). He holds an MBA with a specialisation in BFSI domain. In his career spanning over six years, he has helped thousands of people understand taxes in a simple and effective manner. Outside work, Niteesh is an astronomy geek who is also involved in wildlife conservation activities.