Demonetization – Boon or a Bane for India

Demonetization:

Prime Minister Narendra Modi, on 08 November 2016, exactly a year back, had made a televised

announcement that all currency notes of denominations of Rs 1,000 and Rs 500 would become illegal tender

from the midnight of that day.
Consequently, in just 50 days between 10 November and 30 December 2016, Rs 15.44 trillion worth of Rs 500 and Rs 1,000 currency notes were withdrawn, with the prime motive of the government to attack hoarders of black money, fake currency and terror funding.
These notes constitute 86.9% of the value of total notes in circulation at that time. In its recent report, RBI has confirmed that 99% of the demonetized currency has come back into the system. PM Modi assured the public at that time, that the individual pain of demonetization that they were enduring will eventually accrue far reaching dividends in the ‘long run’. Former PM Manmohan Singh rebutted this
logic and said that, “in the long run we all will be dead”.
The debate on the pluses and minuses of demonetization has been going on ever since it was executed last year. Let us look at whether demonetization has been a ‘boon or a bane’ for the country:
Demonetization a Boon-
Expansion of Tax Base
The total number of tax returns filed has registered a rise of 24.7% as compared to the previous year. The total number of returns (electronic plus paper) filed during the entire fiscal year 2016-17 was 5.43 crore which is 17.3% more than the returns filed during fiscal year 2015-16. The effect of demonetization is also clearly visible in the 19% growth in direct tax collections. A total of 1.26 crore new taxpayers (return filers plus non-filers making tax payments) were added to the tax base up till 30 June 2017.
Collection o f advance tax under personal income tax showed a growth of about 41.79% over the corresponding period in 2016-2017 and collection of self-assessment tax under personal income tax showed a growth of 34.25%. According to the inc ome tax department, the number of e-returns of individual taxpayers filed till 05 August increased to 2.79 crore from 2.22 crore filed during the corresponding period of last year, registering an increase of about 57 lakh returns, or 25.3%. Hence, in the succeeding years, tax compliance will rise further.
Enhanced Effectiveness of Legislations to Curb Corruption
Government, in the previous year, has passed important legislations, like, law to curb Benami transactions, amending of India’s Double Taxation Avoidance Agreements with Mauritius and Cyprus, Bankruptcy and Insolvency Laws. Hence, demonetization must not be viewed in isolation; it must be seen as a part of the larger design to unearth black money.
Improvement in Digitalization
Digitalization improves transparency in dealing and gives a push towards creating a formal economy. There has been a substantial, 38% increase in transactions using credit and debit cards at Point of Sale (PoS) terminals since demonetization.
Further, digital payments using Unified Payment Interface (UPI) has crossed 16 million transactions in volume
and Rs 50 billion in value within 11 months of its launch.
Increase in Share of Small Currency Notes
Connected with demonetization, and to improve transparency, the government has increased small currency
notes in circulation by 28%.
Increase in Bank Accounts and Financial Inclusion
Demonetization and government schemes, like Jan Dhan, Mudra and Suraksha, is helping in the financial
inclusion of many under privileged, who were often being duped and conned by money lenders and chit fund
operators.
A total of 30.09 crore accounts have been opened and the money kept in these accounts is valued at Rs 65,800
crore. The money held with the banks is helping to improve their cash reserves.
Improvement in Ease of doing Business in India
As a consequence of initiatives to curb corruption, like demonetization, India has climbed 30 notches higher in
the previous one year.
Consequently, the foreign exchange inflow is at an all time high of $32 billion and the total foreign exchange
reserves at a record high of $400 billion.
Liquidity Crunch of Banks Resolved
The Public Sector Banks in India had been facing the serious challenge of maintaining the required capital
buffers in cash to meet the minimum capital requirements as laid down by Basel III norms.
Basel III is an international regulatory accord that introduced a set of reforms designed to improve regulation,
supervision and risk management within the banking sector.
In order to stop the continuous decline of Indian rupee against the dollar, RBI had to buy dollars from the
market last year and, for every dollar it bought, an equivalent amount in rupees was injected into the
system. Consequently, the Indian banking sector had a liquidity crunch.
Demonetization led to nearly 1.7 trillion notes coming back into the banking system. Hence, helping the
government in general, and the public sector banks in particular to tide over their liquidity crunch to remain in
the reckoning internationally.
Demonetization a Bane-
Drop in GDP
The combined effect of demonetization and hasty implementation of GST has resulted in a 2% drop in GDP,
which effectively translates into a sum of around Rs 2 lakh crore.
It is the slowest pace of economic growth in the previous three years and the analysts say that the road to
recovery is steep and uncertain.
Job Losses
The informal, small scale sector in India, which relies on cash transactions for its business, constitutes 40% of the country’s GDP and 90% of the job market. An abrupt ban of a major chunk of the currency put this sector completely off the rail.
As per the survey conducted by Centre for Monitoring Indian Economy, nearly 1.5 million jobs were lost in
the period January to April 2017 as a result of demonetization.
Debate on Modi Government’s Objectives for Demonetization
Objective-I: Remove Black Money from the System
It is a known fact that a parallel black money economy exists in India. However, what needs to be understood
here is that only 6% of the total black money exists in the form of cash.
In fact, 90% of this black money is parked overseas in tax heavens like Mauritius and Singapore. The balance is in the form of Benami properties and Gold. Interestingly, there has been a major surge in the import of gold since 9/11.
Secondly, in the beginning of this year, government had allowed Rs 7000 crore of bad debts of State Bank of
India to be converted into Non Performing Assets (NPA).
Similarly, bad debts and disproportionate assets acquired through corrupt means by absconders like Vijay
Malaya and Lalit Modi are far from being recovered.
Besides, a lot of agencies like builders, CAs and even private banks helped the corrupt to convert their black
money into white. In fact, 99% of banned currency getting back into the system is an indicator that the
hoarders were able to convert most of their black money into white.
Thus, the objective of squeezing out black money from the market by demonetization has not been able to really curb accumulation of illicit wealth. On the contrary it has legalized their illicit wealth.
Objective-II: Tackle Menace of Counterfeit Currency
It may be noted that the quantum of counterfeit currency in the system is a miniscule 0.028% of the total currency in circulation.
Moreover, there is no guarantee that the counterfeits of the new currency cannot be prepared. In fact, a counterfeit of Rs 2000 was recovered in Bangalore just a few days after demonetization.
The massive exercise to print new currency at a colossal cost to fish out just 0.028% of counterfeit currency that can again be printed appears to be counterproductive.
Objective-III: Stop Terror Funding
It is a well known fact that the terrorists do not deal in cash, but invariably their funding is done through electronic transfers.
The terror organizations utilize ‘hawala’ route, mainly through fake/ shell companies operating abroad to draw funds.
Thus, unless we have more stringent means to monitor electronic banking and tackle black money stashed in
tax heavens, we will not be able to stop funding of terror outfits.
There is a UN Charter on preventive steps against terror funding that could be adopted. Demonetization of the
currency is not considered to be an effective step to stop terror funding.
The terror related incidents and stone pelting in J&K have not abated after demonetization.
Objective-IV: Counter Corruption
The most effective way to curb corruption is not by attacking the demand side of it, but the supply side of corruption.
The biggest reason for corruption to multiply in our country is the requirement of funding of political parties.
The same indirectly, pressurizes the executive also to become corrupt.
The big corporate houses are free to support political parties by paying in tax exempted money as party funds.
Naturally, they would then demand favours from the government in return, ushering in corruption. Secondly, the big black money-hoarders have devised new and fool-proof means to convert their black money into white. In fact, the high denomination Rs 2000 notes further facilitates hoarding.
Conclusion
The opposition claims that the hype created by the government about curbing black money and terror funding,etc was a ploy to gain popular support of the common people, who willingly endured the brunt of demonetization. Former PM Manmohan Singh called demonetization “organized loot and legalized plunder” by the BJP government.
Notwithstanding, if we look at the spirit behind this exercise, demonetization has brought about a marked social transformation. If it was better planned and appropriately executed, the positives would have far
outweighed the negatives.

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