Delhi set to ease pain from cash crunch via Budget

An Indian vendor holding up a 2000 rupee note at a vegetable market on the outskirts of Hyderabad, on Nov 21, 2016.
An Indian vendor holding up a 2000 rupee note at a vegetable market on the outskirts of Hyderabad, on Nov 21, 2016. PHOTO: AFP

NEW DELHI • India's government is expected to ramp up spending in its latest Budget this week, seeking to ease the pain from a ban on high-value banknotes that slammed the brakes on the world's fastest-growing major economy.

Ahead of a series of elections, Indian Finance Minister Arun Jaitley will unveil a Budget on Wednesday that analysts say will aim to offset the impact from the so-called demonetisation programme with stimulus measures.

"The overarching focus of the Budget will somehow indicate a gain from pain mentality - how the pain of demonetisation helped the government get some extra resources that it can now spread around," said Mr Rajeev Malik, senior economist at brokerage CLSA. "It's going to be a Budget that is meant to soothe the pain."

Before Prime Minister Narendra Modi's shock decision last November to pull all 500 and 1,000 rupee notes from circulation, the International Monetary Fund (IMF) had forecast that India's economy would grow 7.6 per cent last year, faster than any other major country.

But as the authorities struggled to print replacement notes quickly enough, causing consumer spending to plunge, the IMF knocked a percentage point off its forecast.

The government's prediction is 7.1 per cent growth.

By painting demonetisation as a blitz on corruption and cash hoarding that will ultimately boost tax revenues, Mr Modi has so far escaped a major backlash.

While there were massive queues outside banks in the weeks after Mr Modi's announcement, they have now subsided while limits on withdrawals have eased.

But voters in four states - including the key battlegrounds of Uttar Pradesh and Punjab - will have a chance to deliver their verdict when they begin going to the polls in multi-phase elections from Feb 4.

Analysts say the polls are another reason why the government will be tempted to increase spending on health, education and a rural employment scheme.

There are also expectations of a support package for small and medium-sized businesses which have been particularly hard hit as they are heavily cash-dependent.

"We 100 per cent expect a social-focused Budget," said Mr Malik as he considered the calculations for Mr Modi halfway through the prime minister's five-year term.

"The focus in the first 21/2 years was on reviving growth... We're at the halfway point now and there are some elections ahead, so the shift is towards the social sector," he added.

Big businesses, hit by a drop in manufacturing and construction activity after the cash crunch, also want help. Mr Pankaj Patel, president of the Federation of Indian Chambers of Commerce and Industry, said his members hoped for a cut in corporate tax from 30 per cent to 25 per cent and increased infrastructure spending.

Analysts are worried about how the government plans to fund that support. "The central question before the government is whether a fresh round of fiscal stimulus is required to offset some of the ill effects of currency delegalisation," Mr Devendra Pant, chief economist at India Ratings & Research, said in a recent note.

AGENCE FRANCE-PRESSE

A version of this article appeared in the print edition of The Straits Times on January 30, 2017, with the headline 'Delhi set to ease pain from cash crunch via Budget'. Print Edition | Subscribe