Rooting out corruption from society is easier said than done. Demonetisation is just a “baby-step” in that direction. The government must follow it up with stringent punishments against corruption, tax evasion and benami transactions to build a resurgent nation. It is also upon the Indians to rise to the challenge and embrace digital payments so that the evil does not take rebirth...
It was more than two years ago that I first read a narrative about Samosa Sellers on Mumbai Local trains (Read it Here) and whenever I see a hawker I almost always recollect it making me ponder how smart Indian businessmen accumulate wealth way beyond us salaried people by dodging taxes. So, watching people shell out huge amounts in cash, it is difficult to fathom why so much reliance on cash almost seven decades after independence and a quarter century of economic liberalisation, with successive governments over the years doing precious little to cull this trend.
However, the present government did take “note” (pun intended) and it has been 21 days since PM Narendra Modi pushed the ₹500 and ₹1000 bank notes into obsolescence. Since the dramatic broadcast, all kinds of media are saturated with tweets, posts, critiques, commentaries, editorials and blogs from economists, politicians, journalists and (so called) eminent personalities who have debunked the plan giving different rationales why this is not a workable solution. But, being an eternal optimist, I believe that it will succeed, though demonetisation alone will not solve the problems cited by the PM while announcing the scheme; namely: black money, counterfeit currency and corruption. The government needs to take a lot more parallel actions to surmount these obstacles.
Though I am not an expert on economics, I do possess some acquaintance with the discipline attained during high school, graduation and at IIM Lucknow and this, combined with my ‘ear to ground’ approach and ‘common sense’ (which, by the way, is not very common) makes me think otherwise. Based on these, I shall endeavour to put my fifty paisa (for the smaller coins got demonetised earlier) worth views on some of the positives that we can anticipate from this implementation. But a word of caution; these will not bear fruit instantly; we will have to wait for at least two to three quarters for the evidence of any change to emerge and up to five years or more to attain the full benefits of this process. In addition, the government will have to announce certain more steps if it wishes to maximise the benefits out of this move.
First and foremost, this will sweep all the black money and counterfeit currency out of the system, thereby bolstering the government’s reserves by around 25% to say the least. The government can use this to revitalize the economy and drive growth in the long run without impacting inflation. Secondly, it will act as a warning shot to all the people with illegally amassed riches to shut shop and start doing things the right way for it may not be worth acquiring wealth again to lose it to a similar policy in the future. Third, it will put an end to the politician-bureaucrat-criminal nexus which thrives on black money. And last but not the least, the elimination of counterfeit currency has already dealt a heavy blow to terrorists (including Maoists).
Though few experts may contend that cash forms only a minuscule part of illicit assets, it is this black money that gets circulated to generate more black money, acquire physical assets with part of it aiding conversion of black assets to white (as kickbacks). Also, transactions are grossly under reported to evade taxes due to which the goods and services produced, sold and purchased do not get incorporated in the computation of GDP which is not good for an emerging economic power. So, while the black money may be minor in proportion, do not forget that it is this portion of the money which breeds corruption and generates more black money. Thus, with this component (in old currency) depleted, it will take decades for black marketeers to refill their coffers.
Now, black money is nothing but no or under-reporting of income. Let us assume, a merchant procures a product from the manufacturer for ₹100 and retails it for ₹130 (30% mark ups are normal in the industry) in cash, without a proper invoice/bill to the consumer. But his ledgers show the selling price as ₹102 thereby evading tax on the balance ₹28 which he pockets. Similarly, the producer presents bogus receipts of expenses in cash and reports minuscule profits. Consequently, the government’s tax collections (both VAT as well as Income/Corporate tax) are at a loss. Therefore, in a cash shortage scenario, both have to seek the recourse of bank transactions and cannot conceal their actual revenue/outlay and profits thereby boosting both indirect and direct tax collections of the government. Further, in certain instances, the manufacturer and trader destroy their documents of sale and purchase (since there is no money trail) and not only dodge taxes, but the contribution of commodities produced goes unaccounted towards India’s GDP, making us look like a poor nation which is not true. Hence, the move to cashless transactions will ultimately augment India’s GDP in the long run.
Since a person with unaccounted cash can only splurge so much of it on consumer products without arousing suspicion, the tendency is to invest in property as it brings a sense of financial security. As a result, housing has become unaffordable in India more so because the demand for a part of the payment is in “Cash” (read black money). Consequent to the departure of free flowing cash, a large fraction of the population will find it difficult to sell their properties at the “Cash” premium and property rates will naturally reduce. Furthermore, the government needs to come up with a stringent law against “Benami property” conjoined with reduction in stamp duty and circle rates to enable genuine buyers to realise their dream of owning a decent home.
Looking from another point of view, though you can spend only so much over consumables, easy availability of unaccounted cash does entail reckless expenditure which in turn spurs inflation as there is a rush to get rid of this surplus money which one cannot hoard or invest in immovable assets beyond a certain amount. Curb on this flow will certainly check inflation, which is on a runaway spree despite best efforts of the government and the RBI. Lower inflation will entail lower interest rates, which in turn will help increase economic activities. The massive deposits from the people will also aid the lowering of interest rates as banks will have lots of surplus cash and will have no choice but to offer it back to their customers in the form of loans at lower interest rates. On the flip side, you and I will get lower returns on our bank deposits, which will force us to shift our investment to financial instruments with better perceived returns viz. Shares, Mutual Funds which would again fuel growth.
The biggest positive from this step has been that Indians are getting used to the cashless economy because the lack of currency notes has compelled them to embrace the use of cards, mobile wallets and e-transactions. This will no doubt result in more transparent financial dealings and higher tax compliance by Indians and slowly root out the generation of black money. It is a shame that in a country of 125 Crore people only 1.25 Crore pay Income tax and the worst thing is that the largest chunks of land, the highest of the mansions and the biggest of car owners have (if at all) barely paid any tax all their lives. Mr. Modi’s massive kick to these parasites who do not contribute anything to the nation, but want all the comforts like good roads, sanitation and health care at the expense of other taxpayers, has delighted one and all.
Interestingly, most political parties are accusing the government of being unprepared for this process. However, they are unhappy not because the government was not prepared, but because the government did not let them prepare for it. Thus, in the absence of any forewarning, their piles of cash turned into trash overnight. Further, they are conveniently ignoring the RBI directive to calibrate 10% ATMs to dispense only ₹ 100 notes (Read here) or the earlier incentive to install such ATMs issued in May 2015 (Read here). The problem with Indians is that we lack compliance and that has been the main reasons for banks being unprepared for this mammoth task.
Economic experts contend that counterfeit currency is just a miniscule fraction of the amount in circulation which not only depicts their myopic vision but also reeks of ulterior motives. Importantly, they ignore the potential of our well known adversary to print spurious notes coupled with credible intelligence reports that it was about to inject about ₹15,000 Crores of fake currency in ₹500 and ₹1000 denominations in our country. Thus, if that were to happen, it would have been a catastrophe for our economy and by demonetising the higher value notes, government has averted the disaster just in time.
Furthermore, it is bizarre of opposing politicians to be raising slogans and making their social media cells work overtime to spread rumours to generate unrest, but all credit to Indians for keeping calm and backing the government’s initiative. Despite standing in lengthy queues outside banks and ATMs for hours, they are in full support of the PM’s action. The biggest whiner in this whole exercise has been the “self-confessed sole custodian” of “anti-corruption movement” in India Shri Arvind Kejriwal. The PM has stolen his thunder just before he was dreaming of making an impact on the Punjab election. Therefore, he is running around like a headless chicken throwing pointless accusations against the PM and the government. He must see the writing on the wall and concentrate on governing Delhi instead.
Issuing ₹2000 denomination in place of ₹500 and ₹1000 is not going to prevent black money generation. In fact, the ultimate aim should be to eliminate these gradually as general population learns to deal without “hard cash”. Interaction with people during the last few days has revealed that the fundamental problem is that Indians are unable to get over the habit of using hard cash. Consequently, the queues at the banks and ATMs are continuing and the ATMs are running out of cash within few hours of topping up. So, the need of the hour is for Indians to realise that they have to start using other means of payment like Credit/ Debit cards, mobile wallets, NFC payment if we have to root out the menace of corruption and counterfeit currency.
Additionally, the government must make concerted efforts to educate the populace on using alternate means of transactions which are traceable and reduce the supply of currency notes especially in the denominations higher than ₹100. Also, it needs to enact a legislations allowing only digital transfer for amounts greater than, say, ₹50,000 and provisioning for stringent punishments for anyone found possessing unaccounted cash. Unless the government takes these measures, it will be very difficult to check the rise of the “Black Money Monster” yet again.
