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HomeWorldIndia’s Move to Cut Borrowing Is First Sign That War on Cash Could Be Working

India’s Move to Cut Borrowing Is First Sign That War on Cash Could Be Working

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In one of the first signs that India’s crackdown on tax evaders is helping swell the government’s coffers, it this week lowered its borrowing plan by 4.2%.

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The government says it now plans to reduce the amount it borrows by 180 billion rupees ($2.64 billion). It had budgeted to borrow a net 4.25 trillion rupees in the current financial year.

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

Although the statement doesn’t outline the status of India’s cash flow, analysts say Prime Minister Narendra Modi’s November move to withdraw and replace 500- and 1,000-rupee notes will help catch tax evaders 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, associate director, credit and market research, at India Ratings & Research.

As people queued up at banks to deposit wads of notes, the government offered an amnesty on unreported wealth. People can escape prosecution by paying half of the amount as tax and penalty, and deposit another quarter as an interest-free loan with the government for four years.

Although the government hasn’t yet revealed how much money has been disclosed so far as part of the program that is open until March, analysts believe revenue from it could run into several billions of dollars, providing an unexpected bounty to the exchequer.

“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, which is helping the government cut back on its borrowing, he added.

Last week, while countering criticism that the economy was suffering due to the radical currency move, Finance Minister Arun Jaitley said the tax numbers told a different story.

He said revenue from income tax rose 14.4% up to Dec. 19, without specifying a time period. Indirect taxes such as excise duty, custom duty and service tax also rose a cumulative 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.

For instance, revenue from selling stakes in state-run companies has been below expectations, said Ashish Vaidya, head of trading and asset liability management at DBS in Mumbai.

The response to an auction of telecommunications bandwidth was also “not that great,” he said.

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

Bond markets cheered the cut in borrowing. Yield on the benchmark 10-year note fell 0.11 percentage points to 6.29% in intraday trade Tuesday as the move will reduce bond supplies in the market. Yields move inversely to prices.

For breaking news, features and analysis from India, follow WSJ India on Facebook.

(via WSJ)

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