Banning of the old Indian notes of INR 500 and 1000 denomination from circulation undoubtedly cannot eradicate black economy in the country since the magnitude is estimated to be about 7 to 10 per cent only of the total black economy, notwithstanding the fuzziness in such estimates. In no time, black income gets converted into properties, assets, foreign currencies, gold, consumer durables etc. making it difficult for a public agency to determine their colour. Given the civil rights that we enjoy, it is difficult for the government agencies to catch the guilty during their transactions after they have been converted the illegitimate earnings into assets. Dealing with them when the cash is not disposed off, by setting a limit to the cash that can be possessed, seeking details of its sources or simply through declaring the currency as unusable, is easier.
Understandably, the government has opted for an easier option and brought one and all under its fold. Attacking the process of generating black money would involve complex sector and class specific interventions. Instead of entering the house looking for rats that would involve legal and administrative issues, the State has played the Pied Piper of Hamelin to drag the rats out of the house. However, only one genre of rats could be targeted. The mission can still be defended arguing that black economy cannot be eliminated through a one shot measure.
The proportion of these high denomination currencies that will not return back to the banking system is just one indicator of the success of the mission. Penalties and taxes received through the declared amount would be the other indicator, which by no estimation would be small. More important than both is the message that the government is capable of and also willing to do the unexpected. The government, too, has made it clear that it is just the beginning and that many other measures that would hit at the process of generation of back money or facilitate storage, are on anvil. Indeed, these are being anticipated by the targeted groups with serious trepidation.
The opposition parties have been unanimous and vociferous in launching a full-blooded attack on this measure. This may not be because, as suggested by the party in power, of a larger share of the black money that they have. The fact of the matter is that they have been stumped, particularly those at the left of the centre. “How could a party which represents the interests of petty business community and big industrialists where back money is the norm rather than the exception, launch the initiative”? And more importantly “Why did we not do it ourselves”? Such frustrations are manifest in conjuring criticisms of the most absurd kind i.e.,“The government should have prepared the country for this transition. The machinery for implementing this has not been properly orchestrated so as not to inconvenience the common people.”
Anyone with the least of intelligence would know that any major preparedness in this huge country would have defeated the very purpose of catching the defaulters, when the money is still in their possession. Undoubtedly, one is sad about the village housewife who saved money in old notes and could not explain the accumulated amount or a son, who discovered old notes, saved by his dead father, only after the deadline of December 31, 2016. But addressing such genuine cases would have only opened up the floodgate of corruption. The news about old people dying in queues can run parallel to the incidents of tobacco farmers committing suicide due to cigarette ban. Such tragedies are unfortunate, but may become unavoidable. Nonetheless, the long queues in front of the banks and cashless ATMs even after thirty or forty days of the announcement could certainly have been avoided with better preparation and greater vigilance on the activities of the banking sector.
Opposition has argued that government’s credibility has been undermined and a fear complex is created among citizenry through this measure. While society has to be on constant vigil with regard to violation of civic rights under any regime, the relaxed attitude towards non-payment of legitimate taxes among the middle and upper classes cannot be justified. Indeed there is a fear that other forms of storage of black income would be the next target. The enhanced collection of direct and indirect taxes in the post demonetisation period gives a clear indication of higher tax compliance. The opinion polls too suggest that the government has won the first set in the demonetisation game with regard to public perception and it will be advantage Modi in the coming state elections or the general elections in 2019. However, one can never be sure of that.
The news that the government had to advance the announcement of demonetisation due to the leakage in certain circles has considerable merit. When a Minister in Sri Lankan government suggested a similar move in November 2016, the media made it a source of entertainment as such measures cannot be taken with prior information. The allegation that certain politically connected sections had prior knowledge and had taken care of their illegitimate cash well ahead of the time, however, is serious. It should not be difficult to verify this by examining the recent bank and asset transactions of people who are ‘suspects’. Indian democratic institutions are still capable of bringing this information into public domain, examine the veracity of the charges and take appropriate action.
On employment front, there is definitely bad news. The data from Bombay Stock Exchange suggest that employment rate came down sharply during the last two months of the last year. To an extent this was a continuation of the declining trend of the earlier months. Thankfully, the rate was showing recovery in January, 2017. One must admit that certain trading, construction and even manufacturing activities in the country are operating with a thin surplus. When obliged to pay all taxes, as all their transactions would now be monitored, they will go out of business. The government would have to strengthen social security system and guarantee certain minimum income for them. The apprehension that industrial activities have gone completely off the trail and it would take years to mend the structural deficiencies brought about through demonetisation, can be discounted as the index of industrial production shows a rise in November 2016 against the fall in the previous month on year to year basis (Ministry of Economy, Trade and Industry, 2017). With the rates of interest coming down due to surplus money available with the banks, private business is likely to pick up. It is for the government to step up capital formation in public sector and increase expenditure on social sectors.
Surveys suggest that many among the poor and in the unorganised sector, who were seriously inconvenienced by the move and survived without a livelihood for days and weeks, have not complained much as they know there are others who have suffered huge losses. It is not just the sense of being better off having relatively lesser deprivation, but that they fancy becoming passive soldiers, attacking the cancer of corruption is obvious. Many think, this is a cost worth paying. As there is no valid ground to defend the interest of the class who are the targets (and it is not the top five percent, but include a large part of the upper and middle class), passionate pleas for the poor and the common person have been put forward.
It is ironical that political parties, attempting to be a mouthpiece of the poor, have shown total indifference when the ceiling of heavily subsidised loans under the Prime Minister’s Awas Yojna was hiked on December 31, 2016 to INR 12 lakhs, necessitating monthly EMI of about INR 10,000, clearly designed to facilitate the real estate operators to sell their over-priced unsold houses to the middle class, at the cost of the state exchequer.
Post demonetisation, a large number of Jan Dhan accounts has received deposits, which was a long standing demand of the progressive parties. The money has not come from the government, but from the tax evaders who have used it as a less expensive escape from the tax net by entering into some agreement with the account holders. The government machinery must try and plug this. Also, it must monitor and catch the guilty trying to escape through different channels. Besides, it is not impossible to make the small business and common households a part of cashless economy for eradicating corruption within a given time frame. It is ridiculous to suggest that property prices will shoot up. The present author had predicted movement downhill after a few weeks during which transactions were frozen.
Would the measure curb the financing of terrorism, taking place through genuine and fake notes? All that we have heard from the government emissaries that weapon, explosives and the operations of the terrorists require hefty finances that are likely to be carried out through illegal and fake currency. The volume of such financing remains a matter of speculation. Here, the real success will depend on how the government tackles the root causes and sources through which the activities are financed.
The problem with the National Democratic Alliance government now is that it has raised the expectations of the common people. They expect the government to take similar measures to attack the roots of the black economy. More importantly, they expect it to make surgical strikes on communal and divisive forces in the country and within the government and convince the people that it means business when it talks of ‘Togetherness of all, Development for All’—all includes Dalits, Muslims and women in any order.
Author is Professor, Institute for Human Development, New Delhi. email@example.com