There has been a spate of news on demonetization- more about the big-axe falling on the government recently. Many fingers were pointed at BJP and RBI, to what seemed to ‘them’ as an administration failure. And now, it is also being called a tactical failure. It is also amusing to read that black money holders have actually ‘outsmarted’ the government.
According to the wire, various estimates have been made of the quantum of the money that is not expected to be deposited in banks – ranging from Rs 3 lakh crore to Rs 5 lakh crore. The total amount of high denomination currency circulating in the system on the demonetization day (November 08) was Rs 15.44 lakh crore (Rs 8.58 lakh crore in Rs 500 notes and Rs 6.86 lakh crore in Rs 1,000). On November 28, the Reserve Bank of India announced that Rs 8.45 lakh crore (Rs 8,44,962 crore) in the banned high denomination notes had been deposited in the banks between November 10 and November 27. Banks were closed on November 9.
On the face of it, it is disturbing news. The bank deposits are overflowing with old currency. More than 12.4 cr of the old currency notes (of Rs 500 and Rs 1,000) are safe in the bank vaults. This is high value currency. Does this mean that there really was no counterfeit currency or black money in India? Does it mean that people have the means to convert black to white?
One reason is obvious; that the tax-based black money declaration given by the government did not work. There was a huge cash penalty to be paid, and of course, the apprehension of coming under the tax officers lens for life-long perhaps.
On the contrary, in order to evade tax, a new parallel cash-exchange economy emerged. These money launders were exchanging old currency at premiums of 10% to 50%. Considering that people with huge amounts will knock their doors, a 10% would have amounted to some crore in commission. How did they get hold of the new currency, is another understated fact of corruption.
The government is also dealing with the matter by being on-the-trot all day. How else would they justify introducing one rule every day?
Now many questions are being raised about demonetization as political opportunism, political suicide or economic blunder? Let us try and answer some of these questions.
It can be conveniently seen as political opportunism. After all, back money was the highlight in the BJP election manifesto. And there is no denying of the pressure on the present government to act. From day 1 of Modiji’s Prime Ministerialship, there has been some news concerning the matter. Be it, Swiss banks details or domestic black money. With the biggest assembly election around the corner, demonetization can be an ace card. The news of black money extortion from its unfair custodians was applauded by the masses.
Only later did people realise that there was still visible discomfort to them for withdrawing their own money; while, the illegal trading of old currency was happening-allegedly from the same banks that were refusing them cash. People might have felt overwhelmed but they did not get floored by demonetization. So, is it really political opportunism?
If not, then is it political suicide? What seems like just one step by the present government to fish out black money is really not the first one. The present government has been taking small steps to treat the black economy in India. So deep-rooted it is that there has to be continuous thinking and effort.
Some of the earlier initiatives by the government include:
- SIT appointed in 2014 to investigate the black money economy
- VDS introduced for foreign assets in 2015- it didn’t work out as there was a tax of 60% levied on the declared amount
- Income Disclosure Scheme (IDS) for domestic black money which ended in September
- Benami Transactions (Prohibition) Amendment Act 2016 notified in November
- Taxation Laws (Second Amendment) Bill to ensure that voluntary disclosures of hidden incomes are taxed at 50 per cent, with another 25 per cent going into a zero-interest deposit for four years.
Hasn’t the Modi government been patient with people, by giving them good number of chances to declare black money? It was also being politically smart, as the government did not want to upset its core voter base of traders and professionals. In addition, the government has been persistent in shifting people to the banking way of life. It has even introduced cheap premium accident/life insurance schemes for people. It also intends to make bank transfers than cash transfers to the poor. This is being done to oversee any administration failure. It is a first step towards better and safe administration.
It is safe to assume that demonetization cannot be a suicidal move by a political party of this focus. And, there is a plan-B, or follow-up action to happen soon.
The Times of India quotes Modi as saying that the taxman should not conduct any “post-mortem” on businesses that disclose more since the idea is to encourage them to go legit. Thus businesses that show sudden jumps in turnover or an increase in the number of employees will not be subjected to excess scrutiny of their past.
This is the quote attributed to him by the paper: “There will be no comparison with the past. Officials will not say `take out the old (accounts)’. I have told them no old post-mortem, otherwise no one will come into the mainstream… Yeh afsarshahi (bureaucratic way) nahin chalegi.”
India is a cash dependent economy, and many small trades have suffered because of the sudden cash crunch. Liquidity meant no real business or growth in business. Yet, is it wise to call it an economic blunder?
As reported by Economic Times, Niti Aayog Vice-Chairman Panagaria said, “Financial intermediation has increased after deposits in bank accounts. This means the capital which was privately invested will now be invested through financial institutions. This will have good impact (on the economy). It will increase our efficiency of transactions as we move towards digitised transactions. This will also be a positive thing.”
Modiji said that he could visualise a time when a small trader would be able to obtain a bank loan in minutes, since he would have had a financial track record to back his request. “Now, no bank will give a loan to a dhobi as he has no record of income. If he does, he will get a loan quickly.”