Demonetisation is a disaster, so what options does Modi now have?
On December 13, RBI deputy governor, R Gandhi had an interesting statistic to share with the media. As on December 10, Rs 12.4 lakh crore of old notes that were scrapped under demonetisation have been deposited in banks by the public, he said.
This should have been reason to cheer for both banks and the government after the demonetisation of Rs 500 and Rs 1,000 currencies announced on November 8. But it is not to be. Here’s why.
When the PM announced the scrapping of these currencies, that formed 86 per cent of the currency in circulation, the calculation was that Rs 4-5 lakh crore would never return to the banking system, which it expected would roughly be the quantum of black money in the economy.
Narendra Modi’s war against black money would have seemed comprehensive and complete, with income tax evaders biting the dust, and illegal currency hoarders pleading for mercy. That money, it was presumed, when extinguished, would lower the RBI’s liabilities of that magnitude, enabling it to transfer the benefit to the government to pump prime the economy through huge investments in infrastructure, and dole out to farmers and the weaker sections.
But the math does not look that promising. Of the Rs 15.4 lakh crore of high value-denominated currencies in the system (as on March 2016), deposits and exchanges from the public of the demonetised currencies up to December 10 stood at Rs 12.4 lakh crore.
Considering that another Rs 60,000 crore was already with the banks at their branches and ATMs at the time of demonetisation (as extrapolated by experts based on the numbers RBI made public in 2014-15), some Rs 13.3 lakh crore is already back in the system, with another two weeks to go before banks closed the window to deposit demonetised currency held with the public.
So, how much will be the money that remains as black money, and how will it be extinguished? Not those juicy numbers as earlier projected. In early December, an SBI research report estimated that at least Rs 2.5 lakh crore would remain outside the system.
Well, even that looks too ambitious now, with banks witnessing average daily deposits to the tune of Rs 49,000 crore (though these were in the initial days). Given this, experts feel that 90-95 per cent of the demonetised currency would be back in the system by end-December.
The government has obviously got a wind of the likely low gains from extinguishing the black money in the system. The question, then, is whether the government overestimated the black money or so much of currency had been laundered, again casting a shadow on our taxation system.
A major reason for most of the money getting back into the legitimate banking system is that currency is only a small portion of the black economy. Stocks of unaccounted-for money, in fact, would have been very little compared to other forms in which black assets are held — gold, real estate or in secret accounts overseas.
US-based Global Financial Integrity, in a report titled "Illicit Financial Flows from Developing Countries 2004–2013", estimated that the black money outflow from India stood at $505 billion (nearly Rs 33.3 lakh crore) for the period 2004-2013, making it the fourth largest such outflow globally.
The government has obviously got a wind of the likely low gains from extinguishing the black money in the system, and the narrative seems to have been conveniently shifted to making of a “less cash” economy.
It also wants to focus on imposing high taxes on the hoarders of black money through a new tax amnesty window, and has sworn to come down heavily on those who would skirt the amnesty too. The new norms impose penalties and taxes of 50 per cent on the hoarded money and will have a quarter of a hoarder’s unaccounted wealth locked up for four years, to be used for irrigation, housing, construction of toilets and so on.
Those failing to use this window, if caught, would be slapped with a penalty of 85 per cent.
Will higher tax collections save the day for the government? Highly unlikely.
Even an earlier four-month amnesty window had fetched the government only Rs 65,250 crore in October. An amnesty scheme in the final days of demonetisation with the Income Tax department scrutinising your every move in unlikely to yield any credible result.
The damage has been done, the economy shaken up. What can possibly be done now is to draw up a comprehensive plan to strike at the roots of the black economy, and attempt to snuff out the avenues for creation of black money.
Now, that would call for bringing more transparency in political funding, and weeding out corruption of the bureaucracy. How about that, for a start?
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