Demonetisation: A boon or bane?

First, the sharp drop in the Reserve Bank of India’s (RBI) dividend payout to the government primarily on account of the cost of printing currency and the cost of soaking up excess liquidity from the financial system; then the publication central bank’s annual report for fiscal year 2016-17 (RBI follows a July-June fiscal year) which put the estimated value of the currency that returned to system at Rs 15.28 trillion or close to 99 percent of the currency noted demonetised in November-December 2016; and finally, the release of former RBI governor Raghuram Rajan’s latest book `I Do What I Do’ have once again brought back the focus on demonetisation.

Prime Minister Narendra Modi on 8 November, 2016, announced that all currency notes of denominations of Rs 1,000 and Rs 500 would be invalid from the midnight of that day. In the 50 days between 10 November and 30 December 2016, Rs 15.44 trillion worth of Rs 500 and Rs 1000 currency notes were withdrawn to attack black money, fake currency and terror funding.  These notes constitute 86.9 percent of the value of total notes in circulation at that time.

Right from Day One, the move attracted sharp criticism from many quarters. Particularly, after it had come to light that almost 99 percent of the currency notes are back to circulation, many are questioning the efficacy of the move. What benefit has the demonetisation reaped when 99 percent of the currency in circulation has come back to the system? This clearly shows, no black money was confiscated, they are saying.

Yes, that is true. It is also true that the small industrial units which predominantly operate in cash economy have suffered and some jobs have been lost and economic growth is being affected. But do all these mean that the demonetisation has been a futile exercise? Should we regret this? As a common man and someone who has been closely tracking the people at the so-called bottom of the pyramid first by virtue of heading a large microfinance institution and now a bank which serves this segment with passion along with other segments, I have a different take on this.

We must remember the demonetisation is one of a string of steps that the government has been taking to attack black money. First, it had given a three-month window for bringing back unaccounted money stashed in offshore accounts but the response was not good. The next target was black money within India. The Income Disclosure Scheme 2016 has been relatively successful. It collected Rs 65,250 crore, seven times more than what one such scheme in 1997 had mopped up. The government also passed a law to curb benami transactions and India’s Double Taxation Avoidance Agreements with Mauritius and Cyprus have been amended. We cannot see the demonitisation move in isolation – this is part of the larger design to unearth black money.

Yes, it has not confiscated hordes of black money. However, the banks have reported lakhs of suspicious transactions where people have deposited large amount of cash with banks which their financial background does not justify. In due course, the investigative agencies will get into action and track down these people.

We also need to take into consideration the rise in cashless transactions. Many say this benefit is an afterthought. Be that as it may but the fact remains we are seeing a rise in the use of debit card and credit card, particularly in the segment which probably never used cards before. Every such transaction leaves a trail behind it and makes sure the more and more people will come into the tax net. We cannot ignore the benefits of digitalization of cash transactions and a definite move towards a less cash economy.

The number of Returns filed as on August 5, 2017 have registered a rise of 24.7 percent compared to a growth rate of 9.9 percent in the previous year. The total number of all returns (electronic plus paper) filed during the entire fiscal year 2016-17 was 5.43 crore which is 17.3 percent more than the returns filed during fiscal year 2015-16.

For 2016-17, 1.26 crore new taxpayers (return filers plus non-filers making tax payments) were added to the tax base (till June 30, 2017).

The effect of demonetisation is also clearly visible in the 19 percent growth in direct tax collections. Collection of Advance Tax under Personal Income Tax showed a growth of about 41.79 percent over the corresponding period in 2016-2017; collection of Self-Assessment Tax under Personal Income Tax showed a growth of 34.25 percent.

According to the Income Tax department, the number of e-returns of Individual  taxpayers filed till 5th August increased to 2.79 crore from 2.22 crore  returns filed during the corresponding period of last year, registering an increase of about 57 lakh returns or 25.3 percent. Going forward tax compliance will rise further.

Demonetisation has also improved transmission in the banking system and led to the greater financialization of savings. Look at the way the banks have pared their loan rates in past nine months because they are flush with money. Won’t that bring down the cost of investment when the borrowers decide to lift the bank money? I am also confident that from now on, people will shift their focus from real estate to financial assets such as mutual funds, insurance, among others, as an investment avenue.

Finally, we must take into account two other great initiatives of the government and see the big picture. They are Pradhan Mantri Jan-Dhan Yojana, a national mission on financial inclusion, launched within months of the new government assuming power. It has been trying to expand the banking sector’s reach. As on 30 August, it has opened 30.09 crore accounts and the money kept in these accounts are Rs 65, 800 crore. And, we have seen the launch of Goods and Services Tax or GST in July, the biggest economic reform since 1991 to created a nationwide market.

All these initiatives form a pattern. Let’s not pick and choose and run down one of them. The design is for structural changes. We cannot avoid short term pains for long term gains.