In the aftermath of demonetization announced by prime minister, Modi on November 8, 2016, the air resonates with a tsunami of charges/allegations regarding its alleged ill-effects. It is time to assess the credibility of these charges.
The government has plundered resources of poor
The resources with the poor include (i) money held by him/her in cash [notes of various denominations] or (ii) savings in bank/post office if he/she has an account. As regards (i), he got 50 days time to exchange cash held in 1000/500 denominations for new notes at banks and another 3 months at RBI.
As for (ii), this money is owned by him/her and shall remain so; all that the government did was to put restriction on withdrawal of cash only for a brief period till such time availability of new currency improves. However, there was no restriction on withdrawal/transfer of money by any other mode viz., e-payment or cheque.
Hence, there is no question of alleged plunder even in wildest of imagination of the government.
No gain even as India was plunged into chaos
Critics infer this on a premise that almost the entire money held in 1000/500 notes viz. Rs 1544,000 crores [as on November 8, 2016] has been deposited in banks. This is a flawed premise.
First, not the entire cash embedded in these notes has come back. How much did not come? This will be known only after December 30, 2016 [when the window for deposit in bank closes]. Without doubt, that amount is black; it will be extinguished and to that extent, RBI will gain [the government has already promulgated an ordinance to rule out any scope for ambiguity whatsoever and prevent legal challenge].
Second, even the amount that has come does not automatically become white. Any amount that remains ‘unexplained’ will be black and will be dwelt with sternly as per provisions of amended I-T Act [the bill was passed in just concluded winter session of the parliament]. The government will get huge tax revenue [in hundreds of thousands crores] on these sums.
Third, hoarders who deposited such cash will come under I-T surveillance and in the future, will have no other option but to disclose their income and turn regular tax payers. This will result in perpetual revenue gains to the government even as they become part of the ‘legitimate’ economy.
Fourth, with all the black money that was hitherto in parallel economy entering banking system [a mere 110,000 persons have deposited Rs 400,000 crores; of these 50,000 putting in over Rs 200,000 crores], banks will have access to plenty of capital that they can use to boost credit flow to industries including start-ups.
Therefore, the gains from demonetization are unprecedented even as the pain/inconvenience was modest and transient.
Huge set-back to economic growth
The claims are highly exaggerated. Some disruption was inevitable as a big share of transactions being done in cash sector, 86% of currency [embedded in 1000/500 notes] was suddenly declared invalid and replacement could not be immediately done [due to ‘secrecy’ and ‘logistics’ consideration].
But, this is transient and impact could be restricted only to third quarter ending December 31, 2016. With growth during first and second quarter at 7.2% and 7.6% respectively [prior to demonetization] and growth during fourth quarter slated for revival [in view of improvement in currency situation], the overall growth during current year won’t be very much off the mark.
The Reserve Bank of India [RBI] has revised growth of GDP for 2016-17 to 7.1% from 7.6% projected earlier. This is a small price for huge long-term benefits due to decimation of parallel economy, surge in tax collection, increase in flow of funds to banks all of which will boost growth, increase jobs and income. Indeed, these benefits will start accruing from next year itself.
Meanwhile, emerging numbers even during November/December, 2016 do not point towards any deceleration thereby proving doomsayers wrong. During current fiscal up to December 19, the direct tax collection is higher by 14.4% over the corresponding period last year whereas, indirect tax collection during April – November, 2016 is up by 26% over April – November, 2015.
In a nutshell, but for a minor blip, demonetization has triggered a fundamental shift in economic paradigm to put India on a double digit growth trajectory.
Massive job loss and displacement of workers
This assessment is very ‘myopic’. A person needs a continuous income to run his/her family. For this, the underlying economic system should be conducive to creation of job opportunities.
For decades, this was held hostage to mis-governance and an administration ridden with corruption and nepotism that led to creation of a huge parallel economy. The resultant concentration of wealth and income in a few hands was never in the interest of creating jobs on the requisite scale.
Modi – government is making serious moves to remove this flaw in the economic system and demonetization is a major step in that direction. The job loss is short-term triggered by shortage of cash in those areas where payments were being done in cash. Once, new currency in required measure is pumped in, those jobs will return.
Thereafter, there will be a surge in jobs as the size of ‘legitimate’ economy expands [courtesy, most of un-disclosed transactions come vide banking channels] and government undertakes large-scale investment supported by higher tax collections.
Moreover, with digital getting a big push and workers getting their salary directly into their bank account, they will get paid in ‘full’ unlike the present cash dominated system wherein, they get cheated having to shell out a portion to those dispensing cash.
Farmers left high and dry
This presumes that farmers did not have cash to buy fertilizers, seeds, pesticides etc [affecting sowing] and did not come across customers to buy their produce forcing them to sell crops [mainly fruits and vegetables] at throw away price or destroy it. Critics also argue that farm workers did not receive payment due to paucity of cash.
Prima facie, this argument might appeal as until hitherto, all these transactions were done in cash and that was in short supply during Nov/Dec. But, government made arrangements to rush cash through ‘bank correspondents’ besides pumping more money to cooperative banks via NABARD [National Bank for Agriculture and Rural Development]. Farmers were also permitted to use old notes to buy agri-inputs from cooperative stores. Besides, fertilizer companies were directed to sell product on extended credit.
As regards low price realization from sales, it would be naïve to link it only to demonetization. Farmers throwing tomato, onion or potato on roads for want of buyers is not an unusual phenomenon. This has more do with structural problems facing Indian agriculture viz. obtrusive controls on sale, pricing etc and lack/absence of state/institutional buying support.
Even so, on top of good results during kharif 2016 and sowing during rabi 2016-17 being 6.3% higher, the overall growth in agriculture is expected to be 5%.
Poor stand in queues even as hoarders make a hey day
Nothing could be farther from the truth. The poor/common man standing in the queue [to withdraw cash or swap old notes for new currency] merely went through some inconvenience. But, the hoarder of black cash has gone through most painful period of his life time.
At a stroke of pen, he has seen his entire wealth [albeit illegal] embedded in 1000/500 notes on the verge of destruction. Critics argue that having managed to deposit most of his cash in the bank, he is in comfort zone. This is a wishful thinking as mere act of putting it in bank does not automatically make it white.
The hoarder will have to explain the source. If, he cannot, he would face a nightmare at the hands of I-T. Of course, he has been given a less stringent option of shelling out 50% plus 25% interest-free loan to PM Garib Kalyan Yojna [PMGKY]. This is in lieu of his accepting the wrong and agreeing to be an honest tax payer in future.
As regards, hoarders conniving with bank managers to cheat the government, latter have used its machinery viz. Enforcement Directorate [ED], Finance Intelligence Unit [FIU], Central Bureau of Investigation [CBI], Air Intelligence Unit [AIU] and I-T to nab them. They are being handed out most stringent punishment.
Finally, the poor will have the last laugh as mammoth tax collections from hoarders whose cash comes to banks plus equivalent of money that does not come [on extinguishment of this liability, it is surplus with RBI which eventually becomes available to government] will be used for his benefit only.
A case of monumental mis-management
Critics cite issue of 60 notifications in 43 days after prime minister’s announcement on November 8, 2016 to show that demonetization suffered from policy flip-flop. They are reading too much into it and that too out of context.
At the outset, given dire need to maintain ‘confidentiality’, whatever preparations were needed could only be done after November 8. 2016. Further, since, replacement of mammoth currency of Rs 1544,000 crores [in 1000/500 notes] even at maximum efficiency takes time, shortage was inevitable. In this backdrop, RBI needed to ration and prioritize distribution of new currency which explains a plethora of notifications to begin with.
Those notifications needed to be revised in response to evolving situation on the ground. For instance, the initial cash withdrawal limit of Rs 10,000 for individuals was revised to Rs 24,000 per week as availability of new currency improved. Likewise, the weekly limit for small businesses was increased to Rs 50,000. Similarly, the limit for currency swap was raised to Rs 4500.
The authorities also needed to counter machinations of hoarders to convert their black in to white using ‘disingenuous’ methods. For instance, in initial days, the latter deployed hordes of persons [factory workers, laborers etc] to swap Rs 4000/4500 each. Such flagrant misuse compelled RBI to first reduce this limit to Rs 2000 followed by withdrawal of the facility.
Thus, far from being a case of mismanagement and policy flip-flop as alleged, the government/RBI must be complimented for responding to the needs of public and countering the game plan of hoarders who were hell bent on making the scheme fail.
Narrative changed mid-stream – from black money to digitalization
Curbing black money and digitalization are not mutually exclusive. These two steps complement each other.
As more and more transactions are done on cashless or e-platform, that will leave a trail and it would be impossible for anyone to hide. All of such transactions will necessarily be a part of ‘legitimate’ economy on which the entities will have to pay tax.
Without doubt, digitalization will help in curbing generation of black money. Therefore, Team Modi has been fairly consistent in its narrative by promoting e-payments alongside demonetization.
Tackling black money addresses only a fringe of problem
This is based on a premise that cash accounts for only 6% of GDP even as a major chunk of black money is embedded in real estate, bullion, foreign currency, stashed abroad etc.
But, what critics forget is that the route to acquisition of all such assets is none other than cash. For instance, a person owning 10 flats [albeit in ‘fictitious’ names] would have used un-accounted/black money only to purchase them. The same holds for acquiring other assets like bullion and dollars.
Even so, @ 6% amount of black money held in cash is Rs 900,000 crores [taking current GDP at Rs 150,00,000 crores]. Trapping this mammoth sum by ensuring its natural death by March 31, 2017 [after this date, value of old 1000/500 notes will be zero] or collecting heavy tax on the amount that comes to bank is a huge achievement.
As regards black money held in other forms, prime minister has already hinted at projects to deal with them sternly as 2017 unfolds.
RBI’s autonomy undermined
The statement is factually incorrect. The decision to scrap 1000/500 rupee notes was taken by RBI in its board meeting held on November 8, 2016 [evening]. Union cabinet gave its nod to RBI recommendation/decision same day followed by prime minister’s address to the nation at 8 PM.
Further, considering the far reaching ramifications of the move which gets connected with the entire economy and welfare of 1.3 billion people of India, it is imperative that such a decision is taken only after a due process of consultation between the government and RBI. This is precisely what was done.
The decision could not have been held hostage to a very narrow and mechanical interpretation of the ‘autonomy’ concept.
Where is machinery to deal with the fall-out?
Critics make this observation only to buttress their charge that demonetization has failed.
They ask ‘where is the manpower and infrastructure to deal with the black cash deposited in hundreds of thousands of accounts?’ How will government collect tax from these depositors?
They are only under-estimating the capability of the government to use advanced tools of ‘analytics’ and its manpower to deal with the situation. Meanwhile, Modi has already alluded to ‘engaging 100,000 officers in the I-T’ if need be do the job.
Modi took the decision ‘unilaterally’
Critics allege that Modi did not consult anyone; he did not even take inputs from experts/economists.
This is too frivolous a charge to merit any consideration. Needless to say, this prime minister is prone to taking comprehensive look at minutest details [evaluating all pros and cons] even on small policy matters and holds exhaustive consultations with all concerned before arriving at a decision.
Any thought that he may not be doing it in the context of decision on a major issue such as demonetization can only be in wild imagination of those who are determined to see flaw in every step taken by this government.
Undeterred by malicious propaganda – Modi moves on
In short, all of the above mentioned myths and host of others are part and parcel of a malicious propaganda unleashed by Modi’s opponents only to discredit him and put pressure to make him back out. It is good to see him not acquiescing in and 1.3 billion people extending full support during the 2 months testing period.
With the dawn of 2017, India is poised to reap the unprecedented benefits of this transformative policy decision that will radically change its economic landscape to yield double digit growth, ameliorate conditions of majority of poor and enhance people’s welfare.