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Calling black white
Updated:Sep 7, 2017
 
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By Arun Kumar 
 
Demonetisation has led to much pain. Prime Minister Narendra Modi had promised that the pain would last only for 50 days, but would benefit the country enormously in the future. Invoking the image of soldiers standing at the frontier, it was said, civilians should stand in queues at the banks for a noble cause. People bought this line more or less despite the hardships, including many deaths. Nearly 10 months down the line, where does the nation stand now since the RBI has admitted that almost 99 per cent of the Rs 15.44 lakh crore of the demonetised currency returned to its coffers. In an earlier piece (‘An embarrassment of riches’ IE, August 1), I had mentioned that by January 13, 2017, 98.8 per cent of the demonetised notes were back.
 
 
The proponents of demonetisation have given a new spin. They portray the return of the notes as a success. They claim that those with black money were forced to deposit their illegal hoards in the banks and they can now be caught by the tax department and made to pay additional taxes. This, the argument goes, would expand the tax base. Further, they argue that the idle black money is now in the banks and that would lead to efficiency because the cash-to-GDP ratio would decline. They believe there is a formalisation of the informal economy and that the economy is moving towards a less cash economy. These are the long-term benefits even if there was short-term pain.
 
 
Who suffered and who gained? Are these the same set of people? A large number of those who never generated any black money were put to tremendous hardship. They lost jobs and had to stand in queues for days to withdraw their own money. Trade and businesses suffered. People were forced to return to their villages because they lost jobs in the cities. Routine banking could not be done and the aged faced enormous hardship. In contrast, the well-off never stood in queues because they had customer relations managers who helped them deposit and withdraw cash. Some of the money deposited may have been black, but it is hard to tell whether the currency was black or white since it has the same colour.
 
 
The argument that those who deposited their black money will henceforth be in the tax net is incorrect. It is unclear how many new tax payers have been discovered. The finance minister said there were 91 lakh new tax payers in 2016-17. The Central Board of Taxes has given the figure as 56 lakh and this is the figure quoted by the prime minister in his Independence Day speech. But the Economic Survey says the number increased post demonetisation by 5.4 lakh. The income declared in these tax returns is Rs 10,587 crore so the additional tax collection would be Rs 3,500 crore or 0.3 per cent of the total direct tax collection. Is this the predicted significant enhancement of the tax base?
 
 
It is also said that 18 lakh notices have been sent to those entities which deposited large sums of money in their bank accounts. Businesses have large cash in hand and that is not black. So, it would have to be established that the money deposited was from black incomes. The income tax department does not have the capacity to audit more than a few lakh entities a year. So it is not going to be able to tackle whichever is the correct figure — 91 lakh or 56 lakh or 18 lakh or 5.4 lakh entities. It will take years to collect additional taxes given that there would be litigation. The income tax department wins a tiny fraction of the cases.
 
 
Black cash is less than 1 per cent of the black wealth, so demonetisation was at best capable of unearthing just this much. But, the actual effect is far less than that because 99 per cent of that one per cent is back. So, demonetisation cannot make a dent on the black economy and its failure was a foregone conclusion.
 
 
What does it mean when it is claimed money that was outside has come into the banks or that it has got formalised? Currency in circulation is supposed to move in the economy and not sit in the banks. It also circulates in the informal economy from where it goes back and forth into the banks. Money coming to the banks is lent out to earn a return and not meant to sit idle. Unfortunately, credit off-take from banks is at a historic low because demand is short. It even turned negative for the first time in July. Once the economy picks up, the demand for cash will rise and credit would expand.
 
 
Demonetisation dented the economy severely and it has not yet recovered because capacity utilisation fell and that led to a decline in investment. The unorganised sector has declined by anything from 60 to 80 per cent, according to surveys from that period, and the rate of growth of the economy turned negative. GST has aggravated that effect because it has hit the unorganised sector hard. Thus, the economy, especially its unorganised component, has faced two shocks within six months of each other.
 
 
More digitisation, less cash economy, expansion of tax base via more raids, closing down shell companies and catching benami property could have been implemented independent of demonetisation and the huge shock to the economy. The government admits as much when it says demonetisation was only one of the steps in the fight against the black economy. If so, why pronounce that demonetisation is a success on the basis of outcomes achieved through other steps? Policy success, clearly, is being claimed by invoking afterthoughts.
 
 
 
 
 
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