The direct benefits of demonetisation remain difficult to pin down, at least in hard data but the drawbacks of the policy are far easier to spot.
My dear citizens, I hope you ended the festive season of Diwali with joy and new hope. Today, I will be speaking to you about some critical issues and important decisions." It was a year ago that Prime Minister Narendra Modi first addressed the nation about demonetisation. Late in the evening on November 8, he spoke about corruption, black money and the fight against the two. Then came the bombshell. "To break the grip of corruption and black money," he said, "we have decided that [the] five hundred rupee and one thousand rupee currency notes presently in use will no longer be legal tender from midnight tonight, that is, 8th November, 2016."
The picture grew somewhat clearer in the days immediately after. The rationale for the drastic step was that it would strike at the root of India's black economy and bring an end to a counterfeit currency market that, among other things, funded cross-border terrorism. Demonetisation was also presented as a turning point for the country, a significant departure from a system that was opaque and corrupt to one that was transparent and honest. It was even suggested that the Reserve Bank of India (RBI) (and therefore the government) stood to gain between Rs 3-4 lakh crore from the fact that the RBI's liabilities would reduce by the amount of black money 'extinguished' via demonetisation.
There is no doubting the scale of the problem. A report by US-based think tank Global Financial Integrity (GFI) estimated that $21 billion in black money was taken out of India in 2014 alone. Another GFI report estimated that between 2004 and 2013, more than $505 billion - over Rs 30 lakh crore - left India for foreign shores. Though this figure was described by the Directorate of Revenue Intelligence as 'heavily exaggerated' in a reply to a Supreme Court, appointed SIT, even as a ballpark amount, half a trillion dollars leaving the country illegally is no laughing matter.
However, a year later, the picture remains hazy. The direct benefits of demonetisation remain difficult to pin down, at least in hard data. Positive signs include a report in January this year suggesting that illegal 'hawala' transactions dropped by 50 per cent following demonetisation. The exercise also provided a liquidity bonanza to banks and led to an increase in tax compliance. The drawbacks of the policy are far easier to spot, for instance, within a week of the announcement, several Indians had died for lack of usable cash, some suffering heart attacks while waiting in bank queues. And today, with Rs 15.4 lakh crore (99 per cent of demonetised currency) back in the system, no windfall gain of some, lakh crore appears in the offing either.
This has raised questions about the government's characterisation of 'black money' as stashed-away cash that could easily be unearthed and 'extinguished'. "The answer to the shadow economy is to make the tax system more efficient... not demonetisation," said former finance minister P. Chidambaram at a businessmen's meeting in Rajkot on October 28. "[It is like] saying 'there is a mosquito in my house, so I am going to burn down my whole house'."
For its own part, the government hails demonetisation as a success, despite the RBI report noting that 99 per cent of demonetised money had been returned. Even though this suggested that the attempt had largely fallen flat, finance minister Arun Jaitley said that outright confiscation of money had never been the objective. He stressed the government's position, which had evolved somewhat in the face of fierce criticism over the weeks and months after November 8, 2016, that the aim had been to reduce the economy's reliance on cash, expand the taxpayer net and increase the digitisation of taxation. "[Now] we have more taxpayers, both in direct and indirect tax, as reflected in the 27 per cent rise in personal income tax returns filed and the GST collections in its first month. A larger tax base, more digitisation, less cash and an integration of the informal economy," he said in August.
Big data' analysis of this sort also leads to unearthing legal tricks, like 'shell' companies. These are companies 'on paper', often used to obscure who truly owns an asset or sum of money. Other suspicious activities - such as a single company maintaining an inordinate number of bank accounts, or accounts showing sudden deposits and equally sudden withdrawals of immense sums - also become easier to spot. In that vein, in September this year, the government deregistered 200,000 companies on suspicion of being 'shells' and froze their bank accounts. Reports say it is investigating suspicious deposits made by these companies - which have been inactive for two years or more - totalling about $1 billion. Government sources also talk of some 28,000 companies that collectively maintained almost 50,000 accounts in 49 Indian banks. On the day demonetisation was announced, these accounts showed a collective balance of about Rs 2,600 crore. Between the next day and the day these accounts were frozen, more than Rs 10,000 crore passed through them. Many other companies were found to be maintaining more than 100 accounts each. Over 100,000 individual directors of suspected shell companies have also been identified as suspicious.
My dear citizens, I hope you ended the festive season of Diwali with joy and new hope. Today, I will be speaking to you about some critical issues and important decisions." It was a year ago that Prime Minister Narendra Modi first addressed the nation about demonetisation. Late in the evening on November 8, he spoke about corruption, black money and the fight against the two. Then came the bombshell. "To break the grip of corruption and black money," he said, "we have decided that [the] five hundred rupee and one thousand rupee currency notes presently in use will no longer be legal tender from midnight tonight, that is, 8th November, 2016."
The picture grew somewhat clearer in the days immediately after. The rationale for the drastic step was that it would strike at the root of India's black economy and bring an end to a counterfeit currency market that, among other things, funded cross-border terrorism. Demonetisation was also presented as a turning point for the country, a significant departure from a system that was opaque and corrupt to one that was transparent and honest. It was even suggested that the Reserve Bank of India (RBI) (and therefore the government) stood to gain between Rs 3-4 lakh crore from the fact that the RBI's liabilities would reduce by the amount of black money 'extinguished' via demonetisation.
There is no doubting the scale of the problem. A report by US-based think tank Global Financial Integrity (GFI) estimated that $21 billion in black money was taken out of India in 2014 alone. Another GFI report estimated that between 2004 and 2013, more than $505 billion - over Rs 30 lakh crore - left India for foreign shores. Though this figure was described by the Directorate of Revenue Intelligence as 'heavily exaggerated' in a reply to a Supreme Court, appointed SIT, even as a ballpark amount, half a trillion dollars leaving the country illegally is no laughing matter.
However, a year later, the picture remains hazy. The direct benefits of demonetisation remain difficult to pin down, at least in hard data. Positive signs include a report in January this year suggesting that illegal 'hawala' transactions dropped by 50 per cent following demonetisation. The exercise also provided a liquidity bonanza to banks and led to an increase in tax compliance. The drawbacks of the policy are far easier to spot, for instance, within a week of the announcement, several Indians had died for lack of usable cash, some suffering heart attacks while waiting in bank queues. And today, with Rs 15.4 lakh crore (99 per cent of demonetised currency) back in the system, no windfall gain of some, lakh crore appears in the offing either.
This has raised questions about the government's characterisation of 'black money' as stashed-away cash that could easily be unearthed and 'extinguished'. "The answer to the shadow economy is to make the tax system more efficient... not demonetisation," said former finance minister P. Chidambaram at a businessmen's meeting in Rajkot on October 28. "[It is like] saying 'there is a mosquito in my house, so I am going to burn down my whole house'."
For its own part, the government hails demonetisation as a success, despite the RBI report noting that 99 per cent of demonetised money had been returned. Even though this suggested that the attempt had largely fallen flat, finance minister Arun Jaitley said that outright confiscation of money had never been the objective. He stressed the government's position, which had evolved somewhat in the face of fierce criticism over the weeks and months after November 8, 2016, that the aim had been to reduce the economy's reliance on cash, expand the taxpayer net and increase the digitisation of taxation. "[Now] we have more taxpayers, both in direct and indirect tax, as reflected in the 27 per cent rise in personal income tax returns filed and the GST collections in its first month. A larger tax base, more digitisation, less cash and an integration of the informal economy," he said in August.
Big data' analysis of this sort also leads to unearthing legal tricks, like 'shell' companies. These are companies 'on paper', often used to obscure who truly owns an asset or sum of money. Other suspicious activities - such as a single company maintaining an inordinate number of bank accounts, or accounts showing sudden deposits and equally sudden withdrawals of immense sums - also become easier to spot. In that vein, in September this year, the government deregistered 200,000 companies on suspicion of being 'shells' and froze their bank accounts. Reports say it is investigating suspicious deposits made by these companies - which have been inactive for two years or more - totalling about $1 billion. Government sources also talk of some 28,000 companies that collectively maintained almost 50,000 accounts in 49 Indian banks. On the day demonetisation was announced, these accounts showed a collective balance of about Rs 2,600 crore. Between the next day and the day these accounts were frozen, more than Rs 10,000 crore passed through them. Many other companies were found to be maintaining more than 100 accounts each. Over 100,000 individual directors of suspected shell companies have also been identified as suspicious.
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