From NREGA to Nabard: Here's how govt can redistribute note ban proceeds to poor

The Union Budget to be presented this time is even more significant than under normal circumstances as it comes against the backdrop of the demonetisation program which has been completed with the system now moving gradually towards normalcy. In particular the focus on ‘social scheme’s will be an integral part of the content and hence proposals.

It may be recollected that when demonetisation was announced it was also stated quite emphatically that the purpose was also to bring about redistribution of income. The ideology was that the nations’ wealth was being usurped by black money holders and had come in the way of the country’s progress as tax not paid finally affects the nation. In fact the Chief Economic Advisor had argued that the money that would be brought out from the tax-dodgers would be given back to the poor and hence one had to view the scheme as being one of redistribution.

 From NREGA to Nabard: Heres how govt can redistribute note ban proceeds to poor

NREGA may get higher allocation this time. Reuters

At a later stage the poor were told that they should not return money that was kept illegally in their Jan Dhan accounts by the miscreants. There were also signals sent that there could be transfers of cash received from this scheme into these accounts. Hence, it would be largely expected that the Budget would initiate some of these steps to put the money back into the pockets of the poor.

Presently it is uncertain as to what would be the quantum of black money that would be disclosed under the Income Disclosure Scheme-II, on which 50 percent tax would be paid with another 25 percent being held back for three years. The government has spoken of tracking at least Rs 2-3 lakh crore of declared black money which can mean a bounty in terms of tax receipts which would be around half of this amount. If this were so, there would be substantial funds available to refill the Jan Dhan accounts which were implied in all the justifications and assurances that have been made in the November-December period.

With there being around 26 crore Jan Dhan accounts, and tax realisation of Rs 1 lakh crore on the disclosed income, theoretically, each account could get around Rs 4,000. In case there is some segregation done on the deserving accounts, which will be tough given that the income status of these holders would not be known, the transfer could be enhanced proportionately.

However, it does look likely that such transfers may not overtly take place and the redistribution of resources is more likely to be indirectly done where the government spends on various social welfare programs. One area which comes to mind is the NREGA programme, where the government can target a higher allocation which can be used either as higher wages for the existing users of the scheme or widening of the same across other activities too. The target for this scheme was Rs 38,500 crore for FY17 and could be increased to Rs 50,000 crore with the increment being attributable to the redistribution channel of demonetisation.

Significantly, Prime Minister Narendra Modi has also spoken of several pro-poor schemes in the New Year eve’s speech in the area of interest rate subvention. This may be a substantial amount as there were assurances of subventions of 3-4 percent on housing for the low income groups for loans in the range of less than Rs 9 lakhs and between Rs 9-12 lakhs. This will be very useful for those who have taken loans as their interest outflow will reduce helped also by banks lowering their interest rates on loans. As such subventions are met from the Budget the bank would not really be affected in terms of interest income. This will be a big ticket in the Budget and there would be expectation that the allocation is substantial.

Another subject that was spoken of by the PM was a contribution to the Nabard fund to be used for helping out the cooperative banks that faced repayments issues from farmers. The amount spoken of was Rs 20,000 crore which would enter this year’s budget and would be akin to a similar amount that would be ploughed in by the government for bank recapitalization.

Hence, overall the redistribution is likely to be a combination of direct and indirect mechanisms to transfer the demonetisation proceeds partly to the poor. The tilt is more likely to be towards the indirect routes rather than the direct one as the Jan Dhan accounts have also been misused by several people both by opening new accounts when the scheme was announced as well as the existing ones. In the absence of accurate identification, it will get complicated, and hence the government is more likely to pitch for the indirect routes.

It must be understood that with the Centre passing on a higher proportion of 42 percent of the taxes collected that have to be shared with the states, the thrust of development programmes has to come from the states. The Centre has reserved only specified programmes under its own banner which can be addressed in the Budget. The rest of the thrust must come from the states through their choice of schemes. In this context, the additional tax flows that come from the disclosure schemes would be important as also the call on whether or not they are part of distribution pool. If these collections are to be kept with the Centre, then the onus on redistribution would be in this Budget.

(The writer is Chief Economist, CARE Ratings)

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Updated Date: Jan 20, 2017 10:31:20 IST