The 50-day period that Prime Minister Narendra Modi had asked for from the people of India to bear the pains of demonetisation is over. But the queues at ATMs and banks have not disappeared, although their length may have reduced. It is now being realised that it may take another 2-3 months, if not more, for the currency situation to normalise. Also, the presumption that about Rs 3 lakh crore may not come back to the banking system for fear of being caught has been proven wrong, and almost all the banned currency has made its way back to the banks.
The crooks hoarding black money seem to be smarter than the cop. They devised myriad ways to exchange their banned currency for new notes of Rs 2,000 and Rs 500. Their tricks varied from using thousands of Jan Dhan accounts — with or without the knowledge of account holders — co-opting several bank officials for exchanging their black income for a commission that went up to one-third of the amount exchanged, to conniving with jewellers and bullion merchants and buying gold at double the price that was prevailing just a few hours before the announcement on November 8, and even used priests and peasants to deposit their black money.
Within 2-3 weeks following the announcement, it was clear that a thriving market for currency exchange at hefty commissions had sprung up. The crooks seemed to be beating the super-cop, as in a typical Bollywood movie. The government sensed this as an upcoming failure and pressed the officials of the income tax department, enforcement directorate and even intelligence agencies into service to catch the crooks. A few were nabbed. But they are just the tip of the iceberg, as the total amount of such raids remains well under Rs 10,000 crore. This raised the pitch of critics, who questioned whether this exercise was worth the catch.
A dispassionate analysis of the costs and benefits of demonetisation needs to look at political, social and economic aspects. Politically, so far, whatever surveys are available do not show any drastic fall in the approval rating of PM Modi’s move. One of the most informed readings of the situation is that till now, at least two-thirds of people in the country support this move despite the problems associated with it. This is more than twice the BJP’s voteshare (31 percent) in the 2014 parliamentary elections. That’s a big plus for the BJP. The municipal elections in Punjab gave a flavour of this, but long delays in getting back to normalcy may erode some of this advantage.
Socially too, most people see it as a fight for honesty over corruption and the desire to move to a clean society. Honest people like to see at least some crooks being punished severely. This may be a reflection of the anger of a large mass of people in a deeply unequal society. According to a November 2016 Credit Suisse report on global wealth, the top one per cent own 58.4 per cent of the wealth in India.
Economically, the costs of queuing up — loss of daily wages, drop in business, and even losing some lives, etc. — is hard to estimate. But the gains in terms of likely higher tax revenues may accrue over a period of time and can be reasonably quantified. However, one will have to wait for at least the next two budgets to have a fairer idea of the augmented tax revenues due to demonetisation. But the fight is not over yet, as the PM has already indicated. It may soon extend to benami property, and like the fabled Ali Baba, may catch all the 40 thieves. Property prices are already down by 10-15 per cent and there are indications that they may fall further, giving a big boost to affordable housing.
How can one make this entire effort more meaningful? Here is a list of 10 suggestions: First, make sure that the cops carrying out this operation are honest. Those joining hands with crooks for hefty commissions, be it RBI officials, bankers, bureaucrats, businessmen, politicians, and even Jan Dhan account holders, should be given exemplary punishment — say, a minimum five years of imprisonment — to establish a fear of the law. Second, whistleblowers within the system should be rewarded handsomely, say one per cent of black money unearthed, with a cap Rs 1 crore. This will encourage honest people to become informants.
Third, income tax and bank officials need to follow up with all accounts showing an abrupt increase in deposits. This will be time-consuming but rewarding. Fourth, fix an upper limit for cash transactions, say Rs 20,000, beyond which all transactions should be through the banking system. Fifth, taxes on property, especially stamp duties, need rationalisation to less than 3 percent. Sixth, agri-incomes, which have become another loophole to hide black money, need to be brought under taxation with high exemption limits of, say, Rs 7.5 lakhs. Seventh, the biggest government subsidies touching Rs 2,00,000 crores — on food and fertilisers — be directly transferred to beneficiaries’ accounts to plug leakages and activate dormant Jan Dhan accounts.
Eighth, make political funding transparent. Ninth, keep up the campaign for digital transactions for at least a year, especially in rural areas. Tenth, humility and consultation with domain experts is needed while undertaking such massively disruptive steps. Else, over-confidence risks being destructive, which the nation can hardly afford.
From this perspective, it will be interesting to watch the coming budget. Some compensation to daily wage earners and farmers, who seem to have suffered the most from demonetisation, would be welcome. But instead of extending doles, it may be worth providing relief through higher investments, creating skills, extending insurance and pensions covers, etc., besides DBT of food and fertiliser subsidies. That will go a long way. The writer is Infosys Chair professor for agriculture at ICRIER