Last year when on November 8, 2016 Prime Minister [PM] Modi announced demonetization of high denomination viz. 1000/500 currency notes [at Rs 1544,000 crores, these accounted for 86% of the currency in circulation], this was met with strident opposition not just from the political class but also some leading economists including former PM, Dr Manmohan Singh.
The critics bombarded Modi with a tsunami of charges that included inter alia mis-appropriation of the hard earned savings of common man and using that to waive loans given to corporate big-wigs; imposition of financial emergency with persons not being allowed to withdraw money from their own account; causing unprecedented misery to the poor who was made to stand up in the queue [leading to death in some cases]; huge loss of employment and income; leaving farmers high and dry; inflicting ‘avoidable’ additional cost on the economy due to printing of new currency and so on.
In the same breath, they contended that this had done nothing to unearth black money which was bandied by Modi as the overarching reason for taking this extreme step. Far from that, the hoarders of unaccounted wealth either managed to exchange it with new currency [acting in collusion with corrupt bank officials] or deposited in banks thereby converting it in to white. Thus, hoarders had a hey day even as all others suffered, they concluded.
9 months since, as we look back, most of these apprehensions have turned out to be wild imagination of a few. The poor may have suffered some inconvenience while exchanging old currency with new notes or having to do with somewhat less cash [inevitable when currency swap happens even while maintaining strict ‘confidentiality’]. But, their savings whether in cash or the bank were pretty much safe.
The loss of jobs was only transient limited to businesses run mostly on cash. The GDP [gross domestic product] growth for 2016-17 was somewhat lower at 7.1% – against 7.6% projected earlier – but far from a plunge of 1-2% as expected by economists like Dr Singh. Farmers delivered a spectacular 4% plus growth in agriculture.
That majority of the poor and common man on the street were with prime minister in this transformative decision is vividly demonstrated by their unflinching support to BJP [the party led by Modi] by giving it an overwhelming mandate in assembly elections in Uttar Pradesh [UP] – a state with a population of 220 million and houses an overwhelming proportion of India’s poor.
As regards war on black money, during his Independence Day [ID] address on August 15, 2017, Modi dished out figures to convincingly show that demonetization pressed all the right buttons to not only unearth it but also bring hoarders in to the economic mainstream. Before looking at numbers, it is important to clear a myth that has clouded a proper understanding of its impact.
Critics have described it [read: demonetization] as a flop show on a premise that almost the entire money held in 1000/500 notes [as on November 8, 2016] has been deposited in banks. This was interpreted to mean that hoarders lost nothing even as they were able to convert all of their unaccounted income in to white. Both the premise and the interpretation are flawed.
First, until the Reserve Bank of India [RBI] comes out with the numbers [the exercise is still on], it is premature to say that all of the old currency came to the banks. Some amount must have been held back. That amount say ‘X’ is a clear loss to hoarders and corresponding gain to RBI and in turn, union government [being its owner].
Second, even the amount that has come to banks does not automatically become white. This has been subject to scrutiny using advanced techniques like ‘data analytics’. The Income Tax [IT] department has identified 1.8 million accounts where deposit amount cannot be explained by returns filed in the past; hence, unaccounted or black cash. Of these, 450,000 have agreed to pay tax. The rest are being chased by the department acting in concert with intelligence agencies viz. Enforcement Directorate [ED], Finance Intelligence Unit [FIU], Central Bureau of Investigation [CBI] for appropriate action as per the provisions of IT Act and Money Laundering Act.
As mentioned by Modi in his ID speech, the unaccounted/unexplained cash that has come to the banks is about Rs 300,000 crores of which Rs 175,000 crores is suspicious. The recovery from this by way of tax plus penalty will be huge. Apart from this one time gain, the exchequer will get additional revenue from such persons as having come under IT radar, they will have no other option but to disclose their income and turn regular tax payers. Already, the first four months of current year April-July has seen a jump of 2.2 million in return filers over the corresponding period of last year.
A collateral gain of demonetization is the unprecedented success achieved by Team Modi in nabbing shell companies which are used by dubious characters to launder black money. As mentioned by the prime minister, a huge 300,000 such companies are on government’s radar and out of these 175,000 have been de-registered. Action against the others will follow sooner than later. When, the space to park black money gets choked, there won’t be any incentive to generate.
Concurrently, acting on information received from various sources, the government has carried out a relentless drive against hoarders via searches and seizures. During the last three years, it has unearthed black money worth Rs 125,000 crores. Besides, under Benami Act [2016] – a law that was languishing for close to 3 decades and has now been resurrected by Modi–dispensation – the government has already attached property worth Rs 800 crores in a few months. This amount may be small but the potential is huge.
In a nutshell, all reservations expressed by critics are baseless. The demonetization has achieved the intended objective. Modi has used it successfully to punish the hoarders and is getting back from them resources that belonged to the poor. The same is being returned to them via a number welfare schemes besides investment in job creating assets and giving loans for building houses [plus subsidy – on investment as wells as interest subsidy] and small scale activities for generating self-employment.