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Calling black white

There is a lot of pain, no visible gain, from demonetisation. No amount of spin can mask the fact that it has dented the economy

Written by Arun Kumar | Published: September 8, 2017 12:15 am
Demonetisation, Demonetisation failure, Narendra modi, Note ban, GDP, Black money, Digitisation, Indian economy, Indian Express Prime Minister Narendra Modi had promised that the pain of demonetisation would last only for 50 days, but would benefit the country enormously in the future. (File)

Demonetisation has led to much pain. Prime Minister Narendra Modi had promised that the pain would last only for 50 days, but would benefit the country enormously in the future. Invoking the image of soldiers standing at the frontier, it was said, civilians should stand in queues at the banks for a noble cause. People bought this line more or less despite the hardships, including many deaths. Nearly 10 months down the line, where does the nation stand now since the RBI has admitted that almost 99 per cent of the Rs 15.44 lakh crore of the demonetised currency returned to its coffers. In an earlier piece (‘An embarrassment of riches’ IE, August 1), I had mentioned that by January 13, 2017, 98.8 per cent of the demonetised notes were back.

The proponents of demonetisation have given a new spin. They portray the return of the notes as a success. They claim that those with black money were forced to deposit their illegal hoards in the banks and they can now be caught by the tax department and made to pay additional taxes. This, the argument goes, would expand the tax base. Further, they argue that the idle black money is now in the banks and that would lead to efficiency because the cash-to-GDP ratio would decline. They believe there is a formalisation of the informal economy and that the economy is moving towards a less cash economy. These are the long-term benefits even if there was short-term pain.

Who suffered and who gained? Are these the same set of people? A large number of those who never generated any black money were put to tremendous hardship. They lost jobs and had to stand in queues for days to withdraw their own money. Trade and businesses suffered. People were forced to return to their villages because they lost jobs in the cities. Routine banking could not be done and the aged faced enormous hardship. In contrast, the well-off never stood in queues because they had customer relations managers who helped them deposit and withdraw cash. Some of the money deposited may have been black, but it is hard to tell whether the currency was black or white since it has the same colour.

The argument that those who deposited their black money will henceforth be in the tax net is incorrect. It is unclear how many new tax payers have been discovered. The finance minister said there were 91 lakh new tax payers in 2016-17. The Central Board of Taxes has given the figure as 56 lakh and this is the figure quoted by the prime minister in his Independence Day speech. But the Economic Survey says the number increased post demonetisation by 5.4 lakh. The income declared in these tax returns is Rs 10,587 crore so the additional tax collection would be Rs 3,500 crore or 0.3 per cent of the total direct tax collection. Is this the predicted significant enhancement of the tax base?

It is also said that 18 lakh notices have been sent to those entities which deposited large sums of money in their bank accounts. Businesses have large cash in hand and that is not black. So, it would have to be established that the money deposited was from black incomes. The income tax department does not have the capacity to audit more than a few lakh entities a year. So it is not going to be able to tackle whichever is the correct figure — 91 lakh or 56 lakh or 18 lakh or 5.4 lakh entities. It will take years to collect additional taxes given that there would be litigation. The income tax department wins a tiny fraction of the cases.

Black cash is less than 1 per cent of the black wealth, so demonetisation was at best capable of unearthing just this much. But, the actual effect is far less than that because 99 per cent of that one per cent is back. So, demonetisation cannot make a dent on the black economy and its failure was a foregone conclusion.

What does it mean when it is claimed money that was outside has come into the banks or that it has got formalised? Currency in circulation is supposed to move in the economy and not sit in the banks. It also circulates in the informal economy from where it goes back and forth into the banks. Money coming to the banks is lent out to earn a return and not meant to sit idle. Unfortunately, credit off-take from banks is at a historic low because demand is short. It even turned negative for the first time in July. Once the economy picks up, the demand for cash will rise and credit would expand.

Demonetisation dented the economy severely and it has not yet recovered because capacity utilisation fell and that led to a decline in investment. The unorganised sector has declined by anything from 60 to 80 per cent, according to surveys from that period, and the rate of growth of the economy turned negative. GST has aggravated that effect because it has hit the unorganised sector hard. Thus, the economy, especially its unorganised component, has faced two shocks within six months of each other.

More digitisation, less cash economy, expansion of tax base via more raids, closing down shell companies and catching benami property could have been implemented independent of demonetisation and the huge shock to the economy. The government admits as much when it says demonetisation was only one of the steps in the fight against the black economy. If so, why pronounce that demonetisation is a success on the basis of outcomes achieved through other steps? Policy success, clearly, is being claimed by invoking afterthoughts.

The writer is Malcolm Adiseshiah Chair Professor, Institute of Social Sciences

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  1. S
    S. Gowrishankar,
    Sep 9, 2017 at 3:23 am
    This article is absolutely hollow and lacks any evidence to prove that demonetization is not a success. For instance the author says "The argument that those who deposited their black money will henceforth be in the tax net is incorrect. It is unclear how many new tax payers have been discovered". On the one hand the author says what the government says is incorrect and on the other expresses that there is lack of clarity on how many new taxpayers have been discovered. If the author does not know how many new taxpayers have been discovered, what basis he has to counter the arguments of the government. Similarly he says "....according to surveys..." which survey? Where is the evidence? How can he say 60 to 80 percent of the unorganised sector has declined? First of all the statement 60 to 80 itself is meaningless. Such a huge variance in statistics? This author is not authentic. He talks without evidence and this is just an exercise to practice English comprehension.
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    1. achan kunju
      Sep 9, 2017 at 4:52 am
      Sir It is already reported that majority of new found taxpayers are with in the financial capacity of 5-6 lakhs and there contribution is nil to IT, only workload of IT staff is increased. Recently I purchased an agricultural equipment(Tumba). A TATA Product of 1.8kg specification. The price quoted by various shop for the TATA 1.8kg product varies from Rs300 to Rs380. Funny thing they will open one book and quot the rate. With 300 the shop keeper got profit what about Rs380. Location is Kolencherry a town in Kerala. Visit any shop in New Delhi, bargaining is routine affair. I staied about 20 years at Delhi, purchase something with out bargaining is difficult at Delhi. (Imagine the profit made by this people,same case for any private prac ioner- not bargaining but their income )
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    2. C
      CK
      Sep 9, 2017 at 2:16 am
      Doing Something is any day superior to the 'chalne do ... hum bhi kamayein' at ude of the past. Anyone with basic understanding knew that Demonetization is a crucial but just one of many steps to address the larger corruption that has plagued our Society especially (but not restricted to) during the UPA regime. Any increase in the tax base is a huge plus. Electronic trails of cash in bank accounts have led to a huge amount of data which is amenable to verification and assessments. MOST IMPORTANT, the right signal has been sent to our citizens. My personal experience ... habitual evaders have decided to start paying taxes. People seeking 'black or speed money' have become less obtrusive. Many middle class Indians are hoping that the Rs 2000 currency note is now demonetized. Hope that happens, and is conducted with stringent oversight of banking channels to eliminate collusion of bank staff. We have too many economists who live in an ideal theoretical world!
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      1. K
        kg
        Sep 9, 2017 at 12:30 am
        Daadhi waale Professor ji, Janata hai ki sunti hi nahin, line men khadi rehkar, paise ganwakar bhi kehti hai, MAZA AAYA.Ab maze aane ki cost thode hi dekhi jaati hai? Log jo picture internet men free men dekh sakte hain use cinema men jaakar hazar rupaye men dekhte hain.Kya karen.Sabki dadhi aapki tarah hoti to shayad wo bhi samjhdaar hote.
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        1. Employ Ment
          Sep 8, 2017 at 11:44 pm
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          1. M
            MIGHTY BOMBER
            Sep 8, 2017 at 10:07 pm
            Who will inform the voter about the facts that author has pointed out ? All political parties who are against present economic policies have to start some sort of continuous “jan andolan” that involves general public. Press conference, editorials are of little help.
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            1. A
              ak dev
              Sep 9, 2017 at 12:08 am
              I'll be delighted to know the number of legs your jan andolan will have. Please start it immediately. BJP wants people like you to work for it like Pappu has been working for BJP.
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              1. M
                MIGHTY BOMBER
                Sep 9, 2017 at 8:08 pm
                I have no affiliation to any political party and don't get paid for what I write. You are free to have your opinion.
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