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Why I see one year of demonetisation as a success

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Shshank Saurav
Shshank SauravNov 03, 2017 | 22:15

Why I see one year of demonetisation as a success

November 8, 2017 will mark one year of the surgical strike on black money and reliable information is now available to analyse the outcome of the courageous decision taken by the Narendra Modi-led NDA government. The economic survey suggests that demonetisation has impacted the GDP growth by as much as 1.2 per cent (decrease in real GDP growth in the second half of FY 2016-17) and RBI too came out with the figures pertaining to the move in its annual report. If we talk about the tangible gains of demonetisation, then roughly Rs 16,000 crore of RBI's liability has been extinguished.

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If we just go by the tangible data to measure the success the demonetisation, we are bound to get misleading results. There were various unstated objectives that have been achieved by now and we need to understand their impact on the economy to get a holistic picture.

Increase in tax base

The US Supreme Court pronounced in 1927 that "taxes are what we pay for a civilised society". This statement holds good for India as well. We have a very low tax base and, as a result, very few individuals share the burden while the others disproportionately enjoy at their cost. Direct taxes are based on the principle of equity and this can be achieved in the true sense only when the tax base is increased. Demonetisation has played an important role in bringing more individuals under the tax net and government data suggests both the number of new tax payers and the returned income have seen a steady growth (refer table 1 below).

 

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Fall in interest rates

Demonetisation resulted in a surge in deposits and banks have passed the benefit of increased liquidity as well as reduced policy rates to borrowers (refer table 2). We will witness the impact in the near term when private investment will rebound and the capital formation process will get accelerated.

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A lower interest rate always has the risk of triggering inflationary pressure in the economy, but the current regime should be credited for lowering the interest rate along with containing the inflation at a low rate.

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Operation clean money

The income-tax department has got a large volume of data relating to the cash deposited post-demonetisation. The department is analysing this data and matching the same with the income tax returns of individual citizens. This is a very significant step in checking the black money as the amount deposited in the bank account - for which source of income can't be explained - may become taxable.

The most important point in this entire exercise is that such steps warn the tax payers that they cannot get away with their wrongdoings - and erring citizens will fear the law.

Increase in digital transactions

Digital transactions leave a trail - this essentially makes it difficult to leave your money unaccounted for. Demonetisation has resulted in phenomenal growth in digital transactions (particularly NEFT and IMPS settlements). The impact of increase in digital transactions has to be seen along with the GST framework in which the end-to-end transaction trail is available to government authorities; this leaves little room for defaulters to keep the transactions out of the tax net.

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Demonetisation was intended as a structural reform and will have a long term impact on the economy. India has moved up 30 notches in the "Ease of Doing Business" rankings issued by the World Bank, which takes measures by the government into account.

It has been three-and-half years since Modi resumed office and our ranking improved from the 142nd to 100th position for which PM must be lauded.

Last updated: November 04, 2017 | 01:27
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