Steps to boost spending needed urgently, can't waiting till budget

Demonetisation is not just causing hardships for the common man it is also shifting the focus of the economic policy maker from the future to the near term. Finance Ministry officials are reacting almost every day to address the demonetisation challenges. In the process, they may be losing the plot on economy front.

As I had pointed out on 21 November column it is the RBI that should be responding to these issues. While the RBI governor continue to be unavailable to address concerns of not just the citizens but also investors, mandarins at finance ministry continue to douse daily fires. The challenge will get tougher by the day for that the financial budget is scheduled on 1 February, 2017. The Budget date has also been advanced as the country is trying to synchronise financial year with the calendar year.

Steps to boost spending needed urgently, cant waiting till budget

Representational image. Reuters

The challenge is that in the short-term demonetisation is likely to have an impact on spending, trade, tourism, logistics, real estate. This needs to be addressed immediately and the government shouldn't wait till budget to fix the problem. Technically the process of demonetisation is expected to get over by 31 December this year. The impact of it on some sectors like real estate, gold and tourism will continue in the January-March quarter as well. Therefore, at the least two crucial quarters of the year will surely get adversely affected by demonetisation if necessary steps are not taken immediately.

Some short-term measures have to be announced to accelerate spending and boost the sectors that have witnessed irreparable damage. These measures can't wait till the budget as any delay will lead to further damage. For instance, secondary market deals in the real estate sector have crashed in last fortnight, especially after the demonetisation move. The unorgainsed segment of the sector will be hit hard as experts believe the sector generates black money vitually in every transaction. The black component in old currency notes has led to the collapse of transactions. It may recover but the impact on real estate prices is real, which is good by itself as it makes housing affordable. But deals may still not happen due to high circle rates. As the prices come down circle rates have to adjust downwards for these deals to happen. This is something only the state government can do if it wants to bring back the liquidity in the real estate market.

The central government can tinker at the most with some FDI norms. What it can do is provide for a higher income tax exemption on home loan payment to push the retail market to borrow and buy homes. But this subsidy can only come in the budget, or can it be announced now and made actionable in the budget. Such steps will help in bringing back the momentum in growth that has been lost due to poor implementation of demonetisation. As an announcement has the ability to boost sentiment.

Informal, unorganised or the MSME sector, which is the largest employer in the country, too, has been hit by demonetisation. The impact on their business has been due to the loss of liquidity or squeeze in spending in the supply chain, which means the issue is more complex for a single step that could help it directly. Consumer behavior after demonetisation indicates that people have curtailed discretionary spending to save cash. This is a serious issue because the huge of black money in the sytem in the past majorly contributed towrards the high item sales. High value items that used to be bought with unaccounted money has also vanished. To replace unaccounted money spend and discretionary spend, the government will have to take measures in the short term and not leave it till the budget.

This is one more reason for the mandarin to step out of the line of fire on demonetisation and focus on these immediate short-term measures. It is one reason too many for the RBI Governor to start responding to implementation issues. The former Prime Minister Manmohan Singh criticised the government on implementation but also polarised the issue with his statement on plunder and legalised loot. His estimate of a drop of 2 percent in GDP also seems to be strange, especially, without any explanation on how he arrived at this magic figure.

But the impact of demonetisation on the economy is real in the short term as I have pointed in the past. Therefore, it is important that officials think of some immediate steps. Any delay because of being mired in solving implementation failures is going to have a much bigger impact on the real economy.

The writer is a policy commentator based in New Delhi. He tweets @yatishrajawat

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Updated Date: Jan 12, 2017 09:30:22 IST

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