Basant Potnuru
Since, ninety nine percent of demonetized currency back to banks, the Government now faces a difficult question, if the move was at all worth? This article, in the hindsight, revisits the objectives set and critically analyses the effects of demonetization policy.
The Government’s articulation of demonetization lists the following objectives: 1) to evict the fake currency notes of Rs. 1000 and Rs 500 in circulation; 2) get rid of black wealth held in cash; 3) bring back all the money to banking accounting; 4) identify undisclosed income through Income Tax (IT) raids; 5) and finally, use the opportunity to promote digital payments.
As against the above targets, only 7.62 lakh pieces of fake currency notes worth Rs 41 crores had returned to the banking system and Rs. 16,000 crores (1 percent of Rs. 15.44 lakh crores of demonetized currency) did not come to banks. This ruled out any significant special dividend to the Government and the RBI, as was anticipated earlier. As a positive consequence of demonetization, the tax authorities discovered an undisclosed income of Rs. 17,526 crores and seized Rs. 1003 crores through searches and surveys so far. This number however is not impressive compared to the identification of undisclosed income and seizure of gold and cash during the pre-demonetization years. For example, in 2011-12, Rs. 906 crores worth of cash and jewelry was seized and Rs. 10,649 crores of undisclosed income identified. This can reasonably be projected to a possibility of what has been achieved in the year 2016-17, that is Rs. 1,003 crores of cash and gold seizure and a detection of Rs. 17,526 crores of undisclosed income. The Pradhan Mantri Garib Kalyan Yojana (PMGKY) which provided an opportunity to unaccounted cash holders to come clean too did not produce results as anticipated. Only Rs 2,300 crores was collected against the IT department’s target of Rs 1 lakh crores. Thus, together all these direct monetary benefits accrued from demonetization accumulate to about 35,000 crores only.
Though demonetization has successfully mobilized all money, including that of small savers such as house-wives, small traders and businessmen, into the banking system, these funds with the banks are expected to be used for productive purposes by lending at cheaper rates of interest. Most of these funds however short-term savings were and therefore were expected to be withdrawn quickly rather than of any use for long-term lending purposes by banks. The black money holders who laundered money into the deposits up to the limit of rupees two-and-half lakhs in several bank accounts who are either relatives or otherwise such deposits too were expected to be dried-up quickly.
The latest Economic Survey estimated that demonetization has added 5.4 lakh new tax-payers in the financial year 2016-17. However, the average income quoted by these new tax payers is only Rs. 2.7 lakhs, which would mean that they were required to pay tax for an income of Rs. 20,000 only, as income upto Rs. 2.5 lakhs is granted exemption. Also, most of these new tax payers may not continue to stay in the tax-net, as next year they are not required to deposit whole of their cash collected or accumulated throughout the year.
Demonetisation came as a big bonanza for digital payment platforms. In terms of total volume of digital transactions from all service providers, it rose from 671 million in November 2016 to 957 million in December 2016, but dropped to 862 million in July 2017. In terms of value, the transactions spiked to Rs. 1,044,055 billion in December 2016 but dropped to the pre-domonetisation levels of Rs. 107,481 billion in July 2017.
Thus, if the slowdown in the economy post-demonetization by 1 to 2 percent of GDP growth rate constituting a loss of income of Rs. 1 to 2 lakh crores, plus the new currency printing (Rs. 7,965 cr.) and transportation (Rs. 16,000 cr. as on 6th December 2016) costs, caused inconvenience and loss of lives,etc. are considered, then the demonetization, as an economic case, does not stand the scrutiny. Clearly, the costs outweighed the benefits. Expected long term benefits such as growth in tax revenue, digitization, and decrease in corruption are not convincing or foreseen now, as much as the dreams sold by the experts and the government in the beginning. What needs to be done to curtail the black money is to fix the demand for black money that comes from political parties, real-estate business, government-private sector nexus rather than stressing too much on to curtail the supply of black money through cash-less measures.
(The author is Associate Professor of Economics FORE School of Management New Delhi)
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