Perhaps critics of the Modi Government are taking a very myopic view of demonetisation. The fact remains that note ban was an extraordinary step that was never attempted before anywhere in the world and has had far reaching socio-economic ramifications

The suspense is finally over with the Reserve Bank of India’s (RBI) annual report giving exact details on total value of high-denomination currency circulating in the system. It has given a clear picture about the notes that came back to the banking system and those which did not.

As against Rs 1,544,000 crore  embodied in these notes as on November 8, 2016, Rs 1,528,000 crore came back, leaving a meager Rs 16,000 crore in the hands of the public. This is just about one per cent of the value of invalidated currency.

Opposition parties, especially the Congress, have been citing the report to brand demonetisation as a sham. Congress leader and former Minister of Finance under the United Progressive Alliance Government, P Chidambaram, has led the tirade against team Narendra Modi. This was encapsulated when he said that economists behind the demonetisation move “deserve Nobel prize” as the RBI gained Rs 16,000 crore, but lost Rs 21,000 crore in printing new notes. Perhaps, critics are taking a very myopic view of a step that has had far reaching socio-economic ramifications.

At the outset, if Chidambaram’s math is closely looked at, currency held by the public is liability of the RBI (read what is mentioned on the note “I promise to pay the bearer”). Since old Rs 1,000 and Rs 500 notes were declared invalid, and of these, notes worth Rs 16,000 crore were not returned by the deadline (March 31), these get automatically extinguished and, hence, represents gain to the apex bank.

According to the RBI’s report, the cost of currency printing during 2016-17 was about Rs 8,000 crore (replacement of old currency — contingent upon demonetisation happened within that year). The corresponding cost in previous year being about Rs 4,000 crore, the extra expenses attributable to demonetisation was, therefore, only Rs 4,000 crore (instead of Rs 21,000 crore as per former Finance Minister). In view of the above, the RBI gained Rs 12,000 crore  (16,000-4000) instead of a net loss of Rs 5,000 crore (21,000-16,000). What about the big picture?

True, the Government was expecting that a big chunk ie, about Rs 300,000 crore won’t come back as the cost of disclosing black cash would be higher (due to heavy penalties in addition to tax plus interest) besides jail term. Yet, if only a fraction of this did not come, it only shows a deep-rooted psyche of hoarders that they are not scared of the Government machinery.

This psyche was built over a period of time when successive ruling establishments were soft towards tax dodgers and black moneymongers. The former not only turned a Nelson’s eye to the activities of the latter, but also colluded with them to get a share in the pie. As a result hoarders developed a mindset that they could continue to manipulate and manage the system.

With this mindset, they came in droves, depositing the money in banks, thinking this will automatically become white. Hence, 99 per cent of the old currency was back. This was confirmed by the RBI report, which says that during November 9-December 30, 2016, the banks got “unusual” deposits of Rs 280,000 crore-Rs 400,000 crore.

Merely because the money got deposited in the bank, it would be preposterous to believe that it has turned white. Whether black or white depends on the outcome of its scrutiny vis-à-vis returns filed in the past. If the deposit is out of sync, then clearly, the money is black. Using advanced ‘data analytics’ technique, the Income Tax (IT) department has identified 1.8 million such accounts. In his Independence Day address on August 15 this year, Prime Minister Modi mentioned the unexplained cash of over Rs 300,000 crore. IT, along with other intelligence agencies viz, the Central Bureau of Investigation, the Enforcement Directorate and Financial Intelligence Unit are chasing these depositors for tax recovery, as per the law of the land.

The revenue collected thus, would be even higher than the amount of deposits demonstrating the success of the decision. This is far better than a scenario where Rs 300,000 crore had not come to the bank and gain would be limited to that amount only. Moreover, there are other gains which won’t be available in case of currency destruction in the hands of hoarders.

First, with starters, who never paid taxes in the past, having come on the IT radar will have no other option but to disclose their income in future and become regular tax payers (this would never have happened if the hoarders didn’t bring it to the banks). Already, the e-filers, till date about 28 million are six million higher than during corresponding period in 2015.

Second, the disclosures helped in nabbing shell companies which were being used for laundering black money. As Prime Minister Modi informed, 300,000 such companies are on Government’s radar and out of these, 175,000 have been deregistered (this figure has now crossed 200,000). Action against others will follow sooner than later. When the space to park black money gets choked, incentive to generate it gets automatically killed.

Third, the identification of cash with their real owners was made possible by bank deposits which has helped the IT department intensify drive against hoarders via searches and seizures (till date, the Government has unearthed Rs 125,000 crore) and initiating action under Benami Transactions (Prohibition) Amendment Act, 2016.

Fourth, it helped the integration of the informal sector (contributor of 50 per cent of the gross domestic product) with the formal economy which will bring about greater transparency and higher productivity, more jobs and boost tax revenue aided by the goods and services tax.

Clearly, demonetisation was an extraordinary step, never attempted before anywhere in the world on such a huge scale. Indeed, team Modi deserves the Nobel prize for successfully shepherding real and sustainable gains in the medium and long-term.

(The writer has a PhD in economics from JNU, Delhi)

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