Demonetization – Modi changed goal post, really!

The opposition parties observed November 8 – the day demonetization was announced by Prime Minister, Modi last year – as a black day. It has castigated the government for changing the goal post if only to camouflage its alleged failures.

A senior member of the Congress observed that increase in search and seizure, de-registration of shell companies, increase in the number of persons filing income-tax returns, digitalization etc have nothing to do with demonetization. They aver that the original objective of the exercise was only to destroy the black money which has not been achieved. Nothing could be farther from the truth.

True, the government had estimated that Rs 300,000 crores won’t come back to the system thereby representing a clear gain to Reserve Bank of India [RBI]. The underlying premise was that there was huge risk in their bringing this money to the bank. Apart from heavy tax plus penalty which could exceed the deposited amount [albeit hoarded], the person would also face imprisonment. So, in a bid to avoid extra loss – over and above the hoarded amount – and jail term, he/she would be better off letting it be extinguished in his/her hands.

But, during decades of mis-rule, hoarders have got so much used to managing the system that they don’t fear. So, they came forward in droves to deposit the money. According to RBI, 99% of demonetized currency has come back. From this, they aver that government gained nothing even as it spent heavily on currency replacement besides loss to the economy due to decline in GDP etc.

The averment is untenable as the cash does not automatically become white merely on deposit in the bank. It remains black if not supported by IT return filed by the depositor in the past. A detailed exercise using advanced data analytics brings out that cash deposit of about Rs 368,000 crores made in 23.22 lakh accounts are under suspicion. Surely, these deposits represent unaccounted income. The tax plus penalty on this amount will fetch much more than the gain [albeit to RBI] if money had not been deposited.

During searches and seizure/surveys, about Rs 29,000 crores of undisclosed income was either admitted or detected during 2016-17. The new tax payers increased from 66.53 lakhs in 2015-16 to 84.21 lakhs during 2016-17. The e-returns filed increased from 2.35 crore in 2016-17 to 3.01 crore during 2017-18. A maze of shell companies dealing in black money and hawala were uncovered. 58,000 bank accounts belonging to 35,000 of such companies were caught transacting Rs 17,000 crores after demonetization.

All of the gains are logical concomitants of demonetization. It would be preposterous to argue that these would have accrued anyway even without this drastic step. Take for instance, search and seizure. Without prima facie evidence, IT team cannot venture into this territory. And, collecting evidence in the normal course via discreet enquiries or any other means can be a nightmare.

Here, thanks to demonetization, hoarders on their own came to deliver the evidence along with their unaccounted cash at the doorsteps of government/banks [they could have suppressed it only at cost of full destruction of the value]. This has enabled IT officials to conduct search and seizure on a scale never seen before.

Likewise, lakhs of persons who in the normal course would never have filed their return, have been compelled to do so now. Since, their unaccounted cash is now lying in the bank under IT gaze, they preferred to declare voluntarily and thus escape higher tax plus penalty in the event of being detected by authorities. The result is a surge in the number of filers boosting government’s revenue. The horde of cash reaching banks has also helped in establishing money trail of shell companies and uncovering of their shady transactions.

Digitalization [adoption of electronic mode for all financial transactions] is the other natural corollary of demonetization. Currently, the cash at about Rs 12 lakh crores is down by Rs 600,000 crores when compared to Rs 18 lakh crores in a scenario as usual. But, for demonetization followed by re-monetization, such a drastic reduction and its concomitant benefits would have been unthinkable.

Much ado is being made about decline in GDP growth. The situation is not as bad as it is made out to be.  In the quarter [Qr] ending March 31, 2017, growth at 6.1% was 1.8% lower than Qr ending March 31, 2016 at 7.9%. This is not unusual in a scenario wherein a large segment of the economic activity was cash dominated and 86% of currency value in circulation was replaced. Yet, growth during 2016-17 was 7.1% which was 0.5% lower than 7.6% during 2015-16.

The growth during Qr ending June 30, 2017 at 5.7% was 1.4% lower than during Qr ending June 30, 2016 at 7.1%. This decline too is not unusual considering that in anticipation of GST [Goods and Services Tax] to be launched on July 1, 2017, distribution channels offloaded their stocks leading to reduction in fresh purchases from manufacturers. In the remaining Qrs of current year, growth will rebound. Asian Development Bank [ADB] has projected growth for 2017-18 at 7%.

As regards jobs, a mountain is being made out of a mole. When, such a drastic measure is implemented [with huge long-term benefits viz. tax buoyancy, higher GDP growth, increase in jobs, more money for welfare schemes, transfer of state benefits in full to the poor etc], closure of businesses for some time is unavoidable. But, once the transition is complete, things get back to normal. So, loss of about 15 lakh jobs for a couple of months is not a very big price.

From the perspective of poor, there was relief coming from a one-off source even during tough times. Those who were keen to save their cash [albeit unaccounted] and yet did not want to be identified, gave to their maid/servants/helpers/drivers/workers etc demonetized notes value less than Rs 2 lakhs each [for such deposit, PAN was not required] to be deposited in their accounts. The latter earned a good sum out of this; in some cases the whole of it. But for this, we would have seen widespread protests; but there was none [sans some political parties].

To sum up, demonetization/notebandi [as it is understood in common parlance] has laid the foundation for a shining India in which even the poorest of the poor will have every reason to smile for the entire tenure of his/her lifespan.

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