Last week, the annual RBI report came as a verdict on one of the defining acts of the Narendra Modi government — demonetisation — and the great Indian money count that followed. The results of extinguishing 86 per cent of India’s currency, belatedly announced after 22 months, we now know, are underwhelming.
Over 99 per cent of the Rs 15.3 lakh crore worth of cancelled bank notes are back in the banking system.
Till the government establishes otherwise, there is no black money, since all the money came back. We know that this is not true. At that time, there was talk of Rs 3 lakh crore not coming back, which would have been a windfall for the central government. Now the government has set itself up for the humongous task of discovering how much of this money in the banking system was black money.
What Prime Minister Modi did not bargain for is the ingenuity of the Indian mind and the venality of the banking system. This is the time to evaluate whether his audacious, some say reckless, act benefitted the country or not.
The RBI report reopened old wounds and brought back memories of the trauma the Indian economy was subjected to on November 8, 2016, with heartbreaking stories of personal hardship, endless queues outside banks, jobs disappearing, especially in agriculture and the informal sector where most of India is employed.
The government is fortunate that Indians, particularly the deprived, have a high threshold of suffering. In any other cash-dominated economy, such a severe measure would have triggered riots.
At the time of the announcement of demonetisation, three objectives were declared—eliminating black money, detecting fake currency and blocking the funding of terrorism. The proverbial killing of many birds with one stone.
Unfortunately, the birds are still flying. The alleged black money is now supposedly in the banks, but is yet to be identified; since all the money came back, the existence of fake currency is a mystery. There seems to be no reduction in terrorism, and there is more money in circulation than before, making digitisation claims quite hollow.
To be fair to PM Modi, since he was swept into office in 2014 on the promise of good governance and a crackdown on corruption, he has made a concerted effort to combat the long-standing menace of black money. It may seem tempting to dismiss demonetisation as a capricious act but people who have known the prime minister intimately tell me that nothing he does is ever unplanned. His actions may seem random, but later you figure they were all part of a larger plan. And so it was with demonetisation. He constituted a Special Investigation Team, introduced the Benami Transactions (Prohibition) Amendment Act to curb black money, renegotiated tax treaties and information exchange agreements with tax havens like Cyprus, Singapore and Mauritius to prevent money from being stashed overseas and floated an income declaration scheme to channelise black money back into the system. Demonetisation was to have delivered the coup de grace to the black money monster.
Also, we must not forget that Modi is a politician. Besides all the economic justifications for this action, demonetisation was also a political act. A signal that he was going after the ill-gotten gains of the rich for the benefit of the poor. It worked for a while, as was evident in the massive victory in the Uttar Pradesh assembly elections four months later.
In the multiple schemes launched by the government, it recovered Rs 44,000 crore of black money, and heightened tax compliance. A very commendable effort. But was the pain worth the gain? The jury is still out on that.
Our cover story, 'Demon in the Detail', put together by Deputy Editor MG Arun and Senior Editor Shweta Punj, looks at the road ahead after demonetisation and the war against black money. We also have a panel of five economists experts weighing in on this issue.
Now it is dawning on everyone that the war against illegal money is a long process and not episodic. Now that all the dust has settled on the issue, a silver lining has emerged. The direct tax payer base has increased from 40 million to 67.5 million.
India is notorious for its non-compliance on paying taxes. Can you imagine, we have only about 60,000 individuals with a gross income of over Rs 1 crore? Considering the conspicuous consumption one sees all around, there is still a lot of work the government has to do to make an honest nation of us. No other government in the past has made such a determined effort to target black money. The basic flaw in the government's approach is that all its efforts are towards reducing the supply of black money; it has done precious little to reduce the demand for black money by the corrupt. It can only be done by living up to the promise of minimum government, which the NDA government has not delivered. No wonder the new black money is back.
The government is also on the trail of extremely high value deposits in 1.8 million bank accounts made soon after November 2016. Income tax notices have been sent to over 300,000 persons who had deposited over Rs 10 lakh in their bank accounts but had not filed their returns. The government needs to deploy Artificial Intelligence-based tools to track the money trails to these high-value deposits and identify black money. It needs to do this without terrorising people or slowing down the economy. In other words, gain without causing any more pain.
In the end, like most changes in India, we might just blunder into brilliance, eventually.
(India Today Editor-in-Chief's note for cover story, Demon in the Detail; September 17, 2018.)