Undoubtedly, demonetisation came as a big bonanza but overall, the costs outweighed the benefits. To curb the menace of black money, the focus must be to fix the demand for black money than on curtailing the supply through cash-less measures
Since 99 per cent of the demonetised currency is back to the banks, the Government now faces a difficult question: Was the move worth itIJ This article, in hindsight, revisits the objectives set and critically analyses the effects of demonetisation policy.
The Government’s articulation of demonetisation lists the following objectives: To evict fake currency notes of Rs 1,000 and Rs 500 in circulation; get rid of black wealth held in cash; bring back all the money to banking accounting; identify undisclosed income through the Income Tax department raids; and use the opportunity to promote digital payments.
As against the above targets, only 7.62 lakh pieces of fake currency notes worth Rs 41 crore had returned to the banking system and Rs 16,000 crore (one per cent of Rs 15.44 lakh crore of demonetised currency) did not come to the banks.
This ruled out any significant special dividend to the Government and the Reserve Bank of India, as was anticipated earlier. As a positive consequence of demonetisation, the tax authorities discovered an undisclosed income of Rs 17,526 crore and seized Rs 1,003 crore through searches and surveys so far. This number, however, is not impressive when compared to the identification of undisclosed income and seizure of gold and cash during the pre-demonetisation years.
For example, in 2011-12, Rs 906 crore worth of cash and jewellery was seized and Rs 10,649 crore of undisclosed income was identified. This can reasonably be projected to a possibility of what has been achieved in the year 2016-17; that is Rs 1,003 crore of cash and gold seizure and a detection of Rs 17,526 crore of undisclosed income. The Pradhan Mantri Garib Kalyan Yojana, which provided an opportunity to unaccounted cash holders to come clean too, did not produce results as anticipated. Only Rs 2,300 crore was collected against the Income Tax department’s target of one lakh crore rupees. Thus, together, all these direct monetary benefits accrued from demonetisation accumulate to about Rs 35,000 crore only.
Though demonetisation has successfully mobilised all money, including that of small savers, such as housewives, small traders and businessmen, into the banking system; these funds with the banks are expected to be used for productive purposes by lending at cheaper rate of interest. Most of these funds, however, were short-term savings and, therefore, are expected to be withdrawn quickly rather than of any use for long-term lending purposes by the banks.
Black money holders, who laundered money into the deposits up to the limit of Rs 2.5 lakh in several bank accounts, who are either relatives or otherwise, such deposits too were expected to be dried up quickly.
The latest Economic Survey estimated that demonetisation added 5.4 lakh new taxpayers in the financial year 2016-17. However, the average income quoted by these new tax payers is only Rs 2.7 lakh, which would mean that they were required to pay tax for an income of Rs 20,000 only, as income upto Rs 2.5 lakh is granted exemption.
Also, most of these new taxpayers may not continue to stay in the tax net as next year they are not required to deposit whole of their cash collected or accumulated throughout the year.
Demonetisation came as a big bonanza for digital payment platforms. In terms of total volume of digital transactions from all service providers, it rose from Rs 671 million in November 2016 to Rs 957 million in December 2016, but dropped to Rs 862 million in July this year. In terms of value, transactions spiked to Rs 1,044,055 billion in December 2016 but dropped to the pre-domonetisation levels of Rs 107,481 billion in July 2017.
Thus, if the slowdown in the economy post-demonetisation, by one to two per cent of the gross domestic product growth rate, constituting a loss of income of one to two lakh crore rupees, plus the new currency printing (Rs 7,965 crore) and transportation (Rs 16,000 crore as on December 6, 2016) costs, caused inconvenience and loss of lives etc, are considered, then the demonetisation, as an economic case, does not stand the scrutiny.
Clearly, the costs outweighed the benefits. Expected long-term benefits such as growth in tax revenue, digitisation, and decrease in corruption are not convincing or foreseen now as much as the dream was sold by the experts and the Government in the beginning. What needs to be done to curtail the black money is to fix the demand for black money that comes from political parties, real-estate business, Government-private sector nexus rather than stressing too much on to curtail the supply of black money through cash-less measures.
(The writer is Associate Professor, Economics and Business Policy, FORE School of Management, New Delhi)