Is India’s war on cash paying off?

Is India’s war on cash paying off?

In an early sign that India’s crackdown on tax evaders is helping to swell coffers in New Delhi, the government this week lowered its borrowing plan by 4.2%.

The government now says it plans to cut the amount that it borrows by 180 billion rupees ($2.64 billion). It had expected to borrow about 4.25 trillion rupees in the current financial year.

The Reserve Bank of India, which acts as a fund manager for the government, said it cut the plan for borrowing “after reviewing the cash position.”

In India, bonds are issued by the government, but the sales processes are conducted by the central bank, which manages all of the state’s fund flows.

Although the statement wasn’t more specific about India’s cash flow, bond market analysts say Prime Minister Narendra Modi’s November move to withdraw and replace 500- and 1,000-rupee notes will help catch tax evaders, make them pay up and increase government revenue.

“It’s because of the tax amnesty scheme or the demonetization that the government would be expecting to get some bonanza through tax penalties,” said Soumyajit Niyogi, an associate director of credit and market research at India Ratings & Research.

As people lined up at banks to deposit wads of notes starting in November, the government offered an amnesty on unreported wealth. Indians can escape prosecution by paying half of the amount in tax and penalties, while depositing another quarter as an interest-free loan with the government for four years.

The government hasn’t revealed how much money has been deposited so far and the program is open until March. But economists say revenue could rise to several billions of dollars, which would be welcome bounty for the government.

“The income disclosure scheme was not budgeted, that could have provided an additional push [to revenue],” said Madan Sabnavis, chief economist at Care Ratings. Tax collection has been rising overall, he said, which has helped the government cut back on its borrowing.

Last week, while countering criticism that the economy was suffering due to the war on cash, Finance Minister Arun Jaitley said tax figures told a different story.

He said income tax revenue rose 14.4% up to Dec. 19, though he didn’t specify if he meant for the fiscal year or thus far in the demonetization program. Indirect taxes—like excise and custom duties and service taxes—also rose a collective 26.2% up to Nov. 30, he said.

“What comes into the banking system gets identified with the person and therefore its impact on taxation and revenue collection is already being seen,” Mr. Jaitley said.

The fact that other important sources of revenue for the government have been lagging indicate that the decision to cut borrowing is a result of the increased tax revenue, said Mr. Niyogi of India Ratings.

The government has raised 214.32 billion rupees with stake sales of state-run companies so far this financial year, which was less than half of the full-year target of 565 billion rupees. With just a quarter left in the fiscal year, economists believe New Delhi will miss its disinvestment revenue target by a significant margin.

Bond investors cheered the planned cut in borrowing as it will reduce supplies in the market. The yield on the benchmark 10-year note fell 0.11 percentage point to 6.29% on Tuesday. Yields move inversely to prices.

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