The 50-day period that prime minister Narendra Modi had asked for—from the people of India to bear the pains of demonetisation—is over. But the queues at ATMs and banks have not disappeared, although their length may have reduced. It is now being realised that it may take another two-three months, if not more, before the currency situation is back to normal. Also, the presumption that about Rs 3 lakh crore may not come back to the banking system for fear of being caught has been proven wrong, and almost all the banned currency has made its way back to the banks.
The crooks hoarding black money seem to be smarter than the cops! They devised myriad ways to exchange their banned currency notes for the new ones, of Rs 2,000 and Rs 500 denominations. Their tricks varied from using thousands of Jan-Dhan accounts, in connivance with bank officials—with or without the knowledge of account-holders—co-opting several bank officials for exchanging their black income for a fat commission that went upto one-third the amount exchanged, conniving with jewelers and bullion merchants to buy gold at double the price that was prevailing just a few hours before the announcement on November 8, and even using priests and peasants to deposit their black money for converting it into white. Within two-three weeks of the announcement, it was clear that a thriving market for currency exchange at hefty commissions had sprung up without any fear. The crooks seemed to be beating the super-cop, in a manner typical of Bollywood-movies. The government sensed this as an upcoming failure and quickly pressed the officials of income tax, enforcement directorate and even intelligence agencies into service to catch the crooks. A few were nabbed. But they are just the tip of the iceberg as the total amount seized from such raids remains well under Rs 10,000 crore. This raised the pitch of critics on whether this exercise was worth the catch.
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A dispassionate analysis of costs and benefits of this unprecedented demonetisation exercise needs to look at political, social and economic aspects. Politically, whatever surveys are available so far, do not show any drastic fall in the approval rating of this move of PM Modi. One of the most informed readings of the situation is that till now, at least two-thirds of the people, if not more, support this move despite all the problems associated with it. This is more than twice the vote-share (31%) BJP got in the Parliamentary elections of 2014. That’s a big plus for BJP, politically. Municipality elections in Punjab give a flavour of this, but the long delays in getting back to normalcy may erode some of this advantage. Socially, too, most people see it as a fight for honesty over corruption and desire to move to a clean society. Honest people like to see at least some crooks being punished severely. This may be a reflection of the anger of a large mass of people in a very unequal society where the top 1% of the people own 58.4% of the nation’s wealth, as of November 2016 as per a Credit Suisse report on global wealth. India’s wealth inequality is worse than even the US’s. Economically, the costs of queuing up, loss of daily wages, drop in business, and even losing some lives, etc, is hard to estimate. But the gains in terms of likely higher tax revenues may accrue over a period of time and can be reasonably quantified. However, one will have to wait at least for the next two budgets to have a fairer idea of augmented tax revenues due to demonetisation.
But the fight is not over yet, as the PM has already indicated. It may soon extend to benami property, and like the fabled Ali Baba, it may catch all the 40 thieves! Property prices are already down by 10-15% and all indications show that they may fall further, giving a big boost to affordable housing.
How can one make this entire effort more meaningful? Here is a list of ten suggestions: first, make sure that the cops carrying out this operation are honest. Those joining hands with crooks for hefty commissions, be it RBI officials, bankers, bureaucrats, businessmen, politicians, and even Jan-Dhan account-holders, be given exemplary punishment, say, a minimum of five years of imprisonment to establish fear of law. Second, whistle-blowers within the system should be rewarded handsomely, say, 1% of black money unearthed with a cap of maximum Rs 1 crore for the informant. This will encourage several honest people to become informants for the government. Third, income tax and bank officials need to follow up with all accounts showing abrupt increases in deposits. This will be time-consuming but rewarding. Fourth, fix an upper limit for cash transactions, say, Rs 20,000, beyond which all transactions have to be made through the banking system. Fifth, taxes on property, especially stamp duties, need rationalisation, to less than 3%. Sixth, agri-incomes, which have become another loophole to hide black money need to be brought under taxation with high exemption limits of say Rs 7.5 lakh per annum. Seventh, the biggest government subsidies touching Rs 200,000 crore, on food and fertilisers, have to be directly transferred to beneficiaries’ accounts to plug large leakages and activate several dormant Jan-Dhan accounts. Eighth, make political funding transparent. Ninth, keep up the campaign for digital transactions for at least a year, especially in rural areas. Tenth, and lastly, humility and consultation with domain experts is needed while undertaking such massively disruptive steps. Else, over-confidence risks being very destructive at times, which the nation can hardly afford.
From this perspective, it will be interesting to watch the coming budget. Some compensation to daily wage earners and farmers, who seem to have suffered most from demonetisation, would be welcome. But instead of extending doles, it may be worth putting that through higher investments, creating skills, extending insurance and pensions covers, etc, besides DBT for food and fertiliser subsidies. That will go a long way.
The author is Infosys chair professor for agriculture, Icrier