The demonetisation move by the government and its resulting political reaction has triggered a much-needed debate and focus on black money. Amid all the political rhetoric, it is worth reiterating some basic facts.
Black money/corruption is one of the biggest threats to our nation. Through its tentacles, it has corroded politics, government and its institutions, democracy, judiciary and the media, and is fuel for criminal enterprise and terrorism. The black economy has significantly expanded in recent years and, according to various estimates, is almost 25-30% of the GDP—amounting to between R30-50 lakh crore, which is larger than the real economies of many nations like Argentina and Thailand, etc. Most Indians want to get cleanse our country of this shameful legacy of corruption and black money.
True to its recent form, the Congress party has opposed it. The UPA era finance minister has jumped into this with many arguments, including calling it a move that “demonises cash” and putting forth the startling hypothesis that it would not have any gains!
Of course, what he leaves out in his fancy word-smithing is that he and the government he was a part of presided over 10-years of a chalta hai attitude and unprecedented expansion of black money and all the risks and dangers it poses; under his stewardship, circulation of 500- and 1,000-rupee notes peaked. Presiding as the UPA did over a culture of rampant crony corruption, what this discourse does is to contrast the UPA government’s inaction or tokenism on black money with this government’s efforts to take the issue head-on.
He makes a disingenuous case, that demonetisation will not address counterfeiting, bribes or plug future black money generation. As a former finance minister, he knows that demonetisation is a significant first step, but has to be followed up with additional steps of better surveillance and tax compliance to ensure that the problem is addressed completely.
He tries another tack, arguing demonetisation doesn’t have any economic gains. But this is akin to suggesting that a disease should be allowed to fester and grow while doctors quibble about benefits of live-saving surgery. Again, notice the sharp contrast between the “highbrow”, “intellectual” inaction of his government and the decisive efforts of the present government.
When all else fails, fire from the shoulder of others. Hence, P Chidambaram also refers to how the former RBI Governor, Raghuram Rajan, was not in favour of demonetisation. In our country, that was beset with scams and crony capitalism of the worst kind in the recent years, black money is as much an issue of morality and the soul of our democracy as it is an economic issue. It is linked to criminality, national security, corporate and political corruption, etc. And Rajan’s dismal record of supervision of our banks, that has since morphed into a full-blown banking crisis , shows that brilliant as he was, he was narrowly focused only on issues of macroeconomics and monetary policy, and failed miserably to make the cut on issues outside these spheres.
There are various estimates on how much currency is in the black economy. This cash is the route to laundering of illegal proceeds into land and bullion. That is why any serious fight against black money has to start with cutting off the domestic black money supply. For those complaining that overseas accounts are being let off, compressing local black money supply is a critical first step even for that. Demonetisation is a crucial step that follows the Voluntary Disclosure Scheme window that the government had offered.
That said, demonetisation is never an easy process, especially when it comes to voiding 86% of circulated currency by value. Disruptions were expected, which is why the prime minister had requested citizens to bear with the inconvenience for the sake of a larger reform. The secrecy and confidentiality requirements also means that no advance preparations could be done because it would have meant involving more people.
Yes, there is legitimate grounds for a debate on whether the government machinery could have executed this better and with more empathy. The disruptions are clearly bad for those in the small and informal sector, the poor and those who remain unbanked or live in underbanked regions. We know that 50% of our GDP and 90% of employment is provided by this country’s informal sector. For decades, it has been shut out of the formal sector and successive governments, and RBI Governors, made no effort to addressing this. It is liquidity and cash availability to the informal sector and small businesses that is at the heart of what needs urgent attention from the government.
As a priority, the government could consider a host of actions, including:
n Permitting regular, receipted transactions in services like health, schools, food, transport, etc, where payers are identified. This can be allowed till December 15. This will ease the pressure on the informal sector.
n Directing all government departments and PSUs to give salaries in cash for next 2-3 months to their employees to reduce the pressure on banks and improve liquidity.
n Clarifying the issue of taxation and penalties on deposits. Many tax lawyers are opining that there is no case for penalties under Income Tax Act for disclosed income. An increase in litigation as a result of demonetisation would be undesirable.
n Ensuring that armed forces and paramilitary forces that are serving in far off places get special attention and dispensation.
The next steps to tackle the black economy must be to target benami property and assets like bullion. Reduction in direct tax rates is a must as a follow-up to this, to prevent further accumulation of black money by incentivising compliance.
While the focus has been on disruptions, the significant benefits of demonetisation and the black money clean-up have not been discussed as thoroughly. Apart from the clear benefits via curbing crime, terrorism, the gains are also for cleaning up of politics and the elections. There are big gains on the governance front in the medium-term. Demonetisation will also transform our economy into an efficient, transparent and clean one. In the short-term, the government will also benefit significantly, both from the taxation on the deposits and also a monetary surplus from RBI. We are talking of a one-time gain of R4-6 lakh crore. This additional spending of the government can and must be directed at investments, jobs and expanding welfare spending for the poor and farmers.
Banks too will benefit from this surge of deposits and from the progressive formalisation of transactions. Increased deposits will cause a moderation of interest rates as a direct benefit—with the added indirect benefit from businesses restarting investment cycle. There are several other benefits that the government must start articulating, planning and realising for the citizens.
There will be an impetus to the formalisation of the informal sector. The informal sector be allowed to avail formal sources of money—almost always at easier rates than the cut-throat rates and risks associated with the informal economy.
The fight against black money is a decisive, serious kind of change. Change is never smooth or orderly. Most Indians desire this clean-up. It is now up to the government to ensure a softer, more sensitive landing for the poor and middle-class.
The author is member, Rajya Sabha