On Balance, the Effects of Demonetisation Have Been Virtuous

Even if Modi’s surgical strike on black money was Intended for the UP Polls, is this not acceptable?

Representative image. Credit: PTI

Representative image. Credit: PTI

Truth often dwells in between relentless cynicism and unfettered optimism. The demonetisation of Rs 500 and Rs 1000 notes have been hailed as the biggest and boldest reform to tackle India’s black economy by some, while others say the real reason behind the move is to upset the apple-cart in the upcoming Uttar Pradesh state elections. People either swear by it or swear at it. There are videos circulating online showing people abusing the people involved to alleging various conspiracy theories.

With this move alone, India’s black economy will not vanish nor will funding to jihadis come to a halt, although it may be disrupted for sometime. The stock of the black economy, like many engineering colleges, homes, shopping malls and apartments, will remain as they are while the float will be sanitised with a much-needed trail. This in itself is not a small achievement. Just like people are entitled to their opinions and the ability to criticise the government, the government is entitled to its well-meaning secrecy. It is not incumbent on the Modi government to explain why they are introducing Rs 2000 notes while removing Rs 1000 notes and why they are withdrawing legal tender with three or four hours’ notice.

Public policies in general do not require street-level consultation – although it is advantageous for politicians to insist on referendum-like discussions for certain policies. To think that this is a surgical strike on black money is correct. But to be optimistic that it would eliminate the black economy altogether is naïve. Even though fake currency is only a small part of the currency float, the changeover still hurts the operators and they will have to rejig their technology, machinery, manpower and network. And even if small, its impact on money supply by jihadi groups will be absolute.

Hence, the more important question that needs to be answered is: What is the expected ratio of efficacy of this policy?

There is no doubt there that there is inconvenience. However, we must not forget that this economy chugs along with credit from the street-corner grocer or vegetable-vendor. Beyond the capital region, some people have settled down to the dynamics of old currency plus credit or deferred payment. Panic in some areas could be because of historical pessimism of the future, which is part of the collective consciousness in Delhi. Panic-buying could be because it provides an opportunity for white-wash and, thereafter, the herd-behaviour takes over. Affected political parties have uploaded their own stage-managed videos onto the web – but that is not all that is happening around the country.

As per the Finance Ministry update 3.5 lakh crore rupees has been transacted till last week, both deposits and conversion put together.  That takes care of 25% of the float. May be substantial amount has been laundered and ironed out by purchase of gold and precious stones and by buying travel tickets in advance.  Of the remaining 50%, some will be deposited through factotums below Rs. 2.5 lakh level, some with figure above that (with 30% tax paid) and some will not surface at all.  The latest item is expected to be of the order of Rs. 2.5 lakh crore which improves the liability figure of the RBI and gives head room to the Government for either deficit financing or bank recapitalisation or both.  Another 5 lakh crore will come with 30% tax which means Government mops up a tax of Rs. 1.5 lakh crore.  The remaining is likely to come in as perfectly legitimate deposit with no taxes to be paid.

It is true that this operation does not capture the foreign deposits which have been created by hawala and the stock of black money in buildings, aero planes and yachts etc., but the system should get back Rs. 1.5 lakh crore whereas it only received Rs. 65,000/- crore from the earlier voluntary disclosure.  This operation should help in reducing the liabilities of the RBI, which in turn helps the Government in doing several things.  Hence the ratio of efficacy of the policy is strongly positive and hence desirable.  Not to forget the data analytics of everyone who has deposited above the stipulated level and below.  That data is invaluable for moving ahead in a white economy.

Assuming that it was done for UP election, is it not acceptable? Of course, it is,  it can’t be anyone’s case that for a democratic election in UP, black money can be condoned.  It had to start somewhere, why not in UP?  It could be that jihadi funding is a small percentage of the money float. But demonetisation has meant the closing of the tap, if not for ever at least for some time to come. Slush money with the Naxalites and ultra groups just become dud-money, reducing their purchasing power.  If it does not stop the black economy completely, it has got critical features which can be taken forward. At the very minimum, the money float is being sanitised and being brought to formal economy, despite some amount being likely to leak as holdings in precious metal, conversion as charities or depositing it in millions of benami accounts.

There are criticisms that the purchasing power will come down and growth rate will show some decline.  But those can’t be drivers in trade-off of long term gain and short term pain.  When GST is being implemented, these data analytics will help us in bring the traders into the tax net whether for direct or indirect taxes.  As of now, the ratio of efficacy is very much virtuous.  We can live with inconvenience if it changes the paradigm of our economy altogether.

Satya N. Mohanty is a civil servant. The views expressed here are personal.

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