With RBI confirming that just Rs 10,720 crore of the Rs 15.4 lakh crore that was demonetised in November 2016 did not come back into the banking system, it is obvious demonetisation (DeMo) was a spectacular failure.
With RBI confirming that just Rs 10,720 crore of the Rs 15.4 lakh crore that was demonetised in November 2016 did not come back into the banking system, it is obvious demonetisation (DeMo) was a spectacular failure even though some, like the economic affairs secretary, have argued that, had it not been for DeMo, India’s demand for cash would have been Rs 3-4 lakh crore more than it is today. In other words, the argument is that thanks to the spurt DeMo gave to digital payments, the economy has become less informal. More evidence of this is seen in the fact that 1.5 crore new taxpayers were added in FY18 alone; and this could go up further with the taxman still examining the replies given by 18 lakh people who deposited Rs 1.75 lakh crore, money that cannot be explained by their known sources of income.
That DeMo failed so badly, though, comes as a surprise since most, including this newspaper, felt that few would risk depositing their black money as, if they were caught—few availed the amnesty scheme prior to DeMo—the penalties would be severe and could involve jail time. That they deposited their black money means they were confident the paper-trail created by their lawyers and CAs were strong enough to withstand the taxman’s scrutiny. The problem with DeMo, however, was that it was born out of morality-play. With cash viewed as bad, no one bothered about the fact that it fuelled a large part of the economy; not surprisingly, several sectors have still not fully recovered from DeMo. Interestingly, while both Russia and Singapore have similar cash-to-GDP ratios, everyone acknowledges Russia’s large illicit economy—that suggests India’s large cash usage had more to do with the fact that its informal sector is large, and informal doesn’t mean black.
It is no one’s case that the black economy mustn’t be weeded out, but GST would weed it out anyway as more and more transactions would get reported to the taxman, making evasion impossible. The compulsory linking of PAN cards and bank accounts with Aadhaar played the same role, as black money could no longer be hidden; so did the taxman’s Project Insight that linked various information databases like those from credit card companies, jewellers, real estate firms, etc—that is why it is not clear the spurt in income tax filers is related to just DeMo, as is being made out.
Such morality play, sadly, is widely pervasive. It stopped the government from freeing natural gas prices or from providing relief to telcos; both sectors are in deep trouble today. It was this same desire to stop even the slightest tax evasion and to charge a higher tax on any product the better-off bought that resulted in such a complex GST that it almost brought the economy to its knees. Hopefully, the government has learned its lesson, will take the criticism over DeMo—and the barbs over its failure—on the chin, and move on.