Demonetisation alone can’t end generation of black money
In a country like India, the common fiat is paper currency which is not backed by derivatives like gold. That being so, any mistrust in the monetary system is not desirable and can cause serious threat to the monetary and banking system.
The major threat faced by paper currency is hyper-inflation. We have heard of it only during the World Wars when currencies were to be brought to the market place in satchel loads to exchange for a few loaves of bread and a small clutch of eggs, barely enough for a few days for a family of six.
More than 50 days have lapsed since November 8, when the government announced the decision to demonetise high value notes of Rs 500 and Rs 1,000, from midnight of that day. I did not even know about it until my daughter studying law in Pune called me up to share the news.
Though only one day short of the 9/11 strike, we did not quite realise how the drive would devastate the Indian economy for quite some time.
Remonetisation, said to begin through reissue of new notes, took quite some time; the only known new tender of purple Rs 2,000 notes showed its garish head after some days and people got to see the Rs 500 note only on the web.
I, for that matter, came to possess four or five Rs 500 notes only last week; it looks olive green and is small but apparently with a lot more security features. By the way, Rs 1,000 notes will not be remonetised.
This is the broad scheme, as it shows up till now.
It is common understanding that when 80 per cent or more of the old notes have returned to the formal banking system, then the drive is not to be considered a big hit.
Thus, a portion of the money returning to the mainstream will be without any profit or loss to both the government and individuals when the exchange is legitimate.
But the point is, not all the money returned can avoid getting taxed at 50 per cent and an interest-free compulsory parking for four years under the Pradhan Mantri Garib Kalyan Yojana Scheme.
While a big chunk returned is supposed to yield fiscal gain to the system ranging from 50 per cent to even 100 per cent implicit tax on the money chosen not to be returned but kept back by the owners.
The questions are many on the implications of demonetisation in quantitative terms and we will discuss some of them here:
1) What is the quantity of 50 per cent gain in the form of tax and what is the extent to which the remaining 25 per cent resulted in compulsory deposit for four years in Garib Kalyan Yojana?
These figures have not readily been made available. Therefore, it is difficult to comment upon these gains.
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| The questions are many on the implications of demonetisation in quantitative terms. |
2) What is the extent of money that was never returned so that it can be denotified to absolve the RBI of its liabilities towards the same, so as to cancel the attendant liabilities that got created at the time of its issue by the RBI.
You can cancel the liabilities like that all right but not quite so without issuing an equivalent amount of new currency notes, they say.
3) Whether this fiscal bonanza can be used for adjustment of assets and liabilities by creation of new money and turn it over to the government for spending? Or still better, use it for writing off non-performing assets.
This is not quite approved by people like D Subbarao, former governor of RBI, as it is feared that it might send wrong signals to people and the economy.
This is perhaps not the only way the above correction of assets and liabilities needs to be done and it is said to be done, according to economists, through a helicopter drop of currency indirectly into the hands of people equivalent to the old liabilities extinguished through cleansing.
Since neither of the above two can represent a direct fiscal gain, the outcome it yields could be compared to one in which the same effect could have been created if the treasury had used its own resources for the stated policy purpose of demonetisation.
4) So what is the correct measure to gauge the success of the black money drive?
It is reportedly the sum of tax collected through destruction of black money. There are wild conjectures doing the rounds on possible gains which are but wide speculations to be taken with a pinch of salt.
Anyway let us listen to what people say.
Let us assume that a third of the Rs 15 trillion demonetised currency represents notes in black only. Then, roughly this will yield at 30 per cent of Rs 5 trillion, which is Rs 1.5 trillion.
Next, black money, per se a third again, is detected to yield tax at 50 per cent of Rs 5 trillion, which is another Rs 2.5 trillion.
Next, if by December 30, say Rs 1 trillion were to remain unreturned, it would yield a further sum of Rs 1 trillion straightaway.
Of the Rs 4 trillion left, a half of it falls within the tax net, it will yield at 50 per cent of Rs 2 trillion, which is Rs 1 trillion.
Lastly, the remaining Rs 2 trillion returned is well within tax limits and hence yields no revenue.
All this is supposed to be reckoned as the measure of success or outcome of the initiative compared to the Rs 3.5 trillion tax revenue collected by the government annually.
What about the gains supposed to come through disabling of counterfeit notes?
This much can be said that the amount of counterfeit notes already in circulation and which changed hands many times over will likely be totally unaffected, except that further counterfeiting can be contained, controlled and curbed to a certain extent if not stopped altogether.
This is particularly due to the special additional security features supposed to have been built into the new notes.
It can therefore be reasonably concluded that demonetisation is a good check against future flows of counterfeit currency, if it is not already sitting pretty in the hands of people.
It also follows from this that demonetisation alone can’t end black money generation in the future as it lacks the capability to function as a surgical tool for all forms of outgrowth of black money.