Six things Modi government can do to deliver after the demonetisation pain is over

There have been numerous economic and pseudo-economic posts weighing the costs and the benefits of the massive demonetisation exercise. People are trying to calculate the number of days it will take to replenish the shortage of cash, the cost of printing new notes, the benefits from tax collected on unaccounted wealth, etc.

But there is one cost which cannot be measured in numbers: The political cost.

A recent survey, highlighted the mood of the people regarding demonetisation as follows:

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Almost 94% of the respondents felt this was a good step. That is huge. Considering BJP got barely 33 odd % of the popular vote in 2014, if 94% people support his move then he has truly struck a cord across political lines, irrespective of what the various opposition parties and their leaders are saying.

But, this 94% support came with riders:

  • 27% felt it was poorly implemented.
  • 36% felt that this move was hurting the poor the most.
  • 66% felt that the move had negatively affected them at least a little, some saying it had hurt them a lot.
  • 73% felt that the Government could have planned this better.

The saving grace was that a huge 85% odd people felt that all this inconvenience was worth it. This is the key. The survey did not ask this question, but it was worth knowing: Why people think all this is worth it, and how do they think they will personally benefit.

And this is the point which will haunt the Modi Government once the initial euphoria is over. Right now, the common man is bearing with the pain, hoping and expecting that some good will come out of this, like a pregnant woman, bearing discomfort for 9 months, knowing that at the end of it all, the joy of holding her baby in her hands will make up for all the pain.

This “baby” is what the Modi Government must deliver. Not now, not after 6 months maybe, but by the end of 2017 odd, if people do not see this “baby”, then it will not take much time for the opposition to whip up passions against the Government.

So how can the Government deliver the baby? The unprecedented collection of taxes due to deposits of hitherto un-taxed money, will fill up the coffers of the Government. And the people will expect to get their fair share in return. The lie told a thousand times that Modi will give Rs 15 lacs to each Indian from black money stashed abroad has already become an urban truth, and this demonetisation can become another such thorn.

The Modi Government might as well think along the lines of using this windfall to speed up development, by funding infrastructure projects, or social welfare schemes, or juicing up ailing sectors like railways, but will this work? In my opinion, the people of this country will demand some tangible, clear, objectively ascertainable good, coming out of all this. And to demonstrate this, the Government may have to consider any or all of the below:

1. Lower Interest rates on loans

This is probably the lowest hanging fruit and something which will happen very soon, which has already started. As the banks are flush with funds, the laws of economics will force them to lower interest rates. But this is a double edged sword. Across the board interest rate cuts can be twisted by the opposition as huge benefits passed on to “suit-boot” corporates, so indirectly the common man subsidises loans of the rich? Secondly, lower rates on loans will also mean lower rates on Fixed Deposits, again hurting the common man. Both these aspects will have to be tackled.

2. Lower Personal Income Tax Rates

The Union budget has been advanced to 1st February, and this will be soon after the 30 December deadline of demonetisation is over. This would be the ideal time to slash the direct taxation rates drastically. Expectations would be high as it is, since the last 2 budgets did not have any major sops. Add to this the demonetisation impact. The time for small-scale tinkering is over. The Government will have to announce a major shift in personal taxation rates, maybe keeping a very low rate for a large initial threshold, so that the net doesn’t shrink, but the existing tax payers get a relief.

3. Lower GST rates

This is the hardest one to crack. The Central Government’s hands will be tied by the GST council which comprises of all the states. The BJP states still my cede some ground, but the others may play spoil sport.  A cut in the media rate of say 1-2% would have a huge impact.

4. Direct Benefit Transfers

A section of the media has already reported this as a possibility and Arvind Kejriwal also has demanded this. And the Government may very well use this method. All the funds can just directly be transferred either in one shot or via staggered payments. For this to be implemented without any hiccup and leakage, the JAM (Jan Dhan- Aadhaar-Mobile) trinity will have to be functional soon, and this has been hinted by I & B Minister Venkaiah Naidu. If this actually works, it would be a huge step, paving the way for further subsidies to be deposited directly into the accounts of the needy.

5. Lower taxes on petrol/diesel

Internationally crude oil prices have been falling but the fall of prices of petrol and diesel in India has not been proportionate. The reason being the Government increased taxes at every stage so as to pass on lesser benefits of falling prices. This of course helped the Government at the macro-level, improving the fiscal position. It would be the perfect time to finally reduce the taxes on fuel, by using this demonetisation windfall to offset the losses.

6. Super populist welfare schemes

Another option before the Government would be to roll out some strong welfare schemes. We have already seen the PM roll out some insurance schemes, but something like a universal healthcare scheme or a medi-claim scheme could be a game-changer. The BJP Government in Goa has already rolled out something similar where the insured can get reimbursement of medical treatment expenses of upto Rs 2.5 lacs even in private hospitals, at a small premium, with the Government bearing the lion’s share of the premium.


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