As Prime Minister Narendra Modi’s self-imposed 50-day deadline of December 30 to resolve the birth pangs of the demonetisation exercise approaches, there are clearly visible lights at the end of the tunnel.
First, it is quite apparent that most, if not nearly all, of the Rs500 and Rs1,000 notes held by people — both the currency notes in active circulation and those which had been carefully hoarded for reasons that we can merely guess — are likely to be returned to the banks. There is certainly likely to be a last-minute rush of people who, faced with a choice of losing the entire sum held in the old bank notes, are likely to avail of the final Income Disclosure Scheme and at least 15 per cent of their (largely) unaccounted wealth. Since the final deposits are also going to be made in KYC-compliant bank accounts only, it is also certain that there will now be an electronic trail linking the holders of large cash deposits and their tax status. My guess is that by the next accounting year on April 1, 2017, India will have many more income tax payers than earlier. This is certain to lighten the tax burden on honest taxpayers who have earlier, in effect, subsidised the dishonesty of those who should have paid tax but didn’t.
Secondly, all the anecdotal evidence suggests that the volume of cashless transactions have risen quite exponentially. It is true that the first weeks of demonetisation led to large scale dislocation in the lives of people who (while not necessarily dishonest) preferred old-fashioned cash transactions to the use of unfamiliar plastic money. Business establishments that too had avoided electronic payment facilities for long, either because of laziness or because they didn’t mind fudging with the proverbial kuchcha bill are perforce being compelled to make adjustments. This is not to suggest that the fudging of indirect tax will cease altogether — it hasn’t anywhere in the world — but the quantum of leakages will decline sharply. State Governments will be the biggest beneficiaries of the lower levels of cash transactions — a windfall that only Mamata Banerjee and Arvind Kejriwal can’t seem to get round to admitting.
However, while there are tangible gains for the exchequer that will also result in a steep fall in some spending on luxuries, the political impact of demonetisation will largely determine on how individuals and communities perceive their benefits from the exercise. Having suffered inconvenience of varying degrees, ranging from loss of income to the harassment of queues, most citizens will now want some return. The will await Finance Minister Arun Jaitley’s Budget speech eagerly.
In view of the tax raids over the past few weeks and the threatening tone of some of the official circulars — maybe necessary in order to create roadblocks for those out to short-circuit the objectives of demonetisation — there is a fear among many tax payers of a return to an intrusive (and by implication, venal) tax regime. The Government, at the very highest level, needs to reassure people that needless harassment will not happen. More important, there must be generalised confidence that any sign of corruption among tax officials will be dealt with very severely. The use of technology by banks and tax offices can actually help identify those people whose accounts need scrutiny. In short, casting the net indiscriminately can be avoided and there can be a more targeted approach that reduces the discretionary powers of tax officials. Steps in this regard will go a huge way in allaying the fears of business people both big and small.
The banks in particular have a special obligation. In the past, thanks to a culture of cronyism, the banks acquired a reputation for being very casual with public deposits. This led to unacceptable levels of bad loans and non-performing assets. The liquidity problems of banks have been addressed by the flood of deposits. Since demonetisation had been preceded by an unofficial credit squeeze, there is now a case for loosening the purse strings. There is a strong case for helping out the small scale and informal sectors that have been worst affected by the cash shortages following demonetisation, particularly if the entrepreneurs are willing to move to more transparent systems of book-keeping that are electronically verifiable.
It is, however, clear that the huge thrust towards a digital economy and cashless transactions can succeed if connectivity in India improves. At present, despite the big advances in this sector, connectivity is patchy — with the public sectors units being notorious laggards. The telecom department now has an obligation to complement the larger moves.
Demonetisation will be debated endlessly for the next two years. Economists are unlikely to be persuaded that the move had a solid rationale. Neither is the media likely to believe that there is more to demonetisation than the suffering of people in queues. For them, as with a lot of the people who have a political axe to grind, demonetisation is the Modi equivalent of Napoleon’s Russian campaign. So far it doesn’t look that way. Indeed there are indications that India is on the cusp of huge changes. However, these changes will take some time to become visible. Till then, the bouts of speculation will persist.