Another criticism is that the pains of demonetisation are far higher than the gains
On January 22, 2017, my article titled ‘Demonetisation: Success OR Failure’ was published in PGurus. I also expanded on it in a Seminar on the same topic at the Constitution Club, New Delhi.
I believed (and continue to believe) demonetisation is likely to be successful, but its success can be assessed objectively only over time, say by 2019 election time.
The biggest criticism against demonetisation is that the PM had said unreturned currency would become worthless, but almost the entire money has returned; so, demonetisation is a huge failure.
Yes, the Government originally expected a substantial amount of unaccounted money not to return. Midway during demonetisation, the Government wanted to give the black money holders an opportunity to turn a new leaf, deposit their unaccounted cash, and start declaring their income fully in future.
Extrapolating the GDP of the previous quarters, the dip due to demonetisation can only be partly attributable to demonetisation, the rest being due to a sliding economy left behind by the UPA Government
And there was another important reason for this strategy. If the entire money were forfeited, the owners would have no motivation to disclose. The Government wanted to identify them, to focus on them in future as potential black money holders.
Another related criticism is that most of the black money was not cash, but in other forms, like gold, immovable property, money & property in foreign lands, and property in benami names in India. They don’t realise that once the unaccounted cash holders are identified, the Government can go after their black wealth in other forms too.
All this investigation cannot happen overnight, as the number of people involved runs into millions. The process of identification of such suspicious unaccounted money & wealth information, serving them notices, getting their responses, waiting for their IT returns, assessing them, and fighting court cases where necessary, will be very long-winding. So, demonetisation is just a lead provider with evidence; just the beginning, not the end. Without it, most of the black money holders can’t be targeted.
I had also suggested in another article that, in view of the shortage of ITOs to handle such voluminous work, the Government should follow strategies like automation, Pareto analysis (80:20) and big data analysis to ‘maximise the gains of demonetisation in quick time’ without recourse to Inspector Raj. The Government is doing something very similar, and I believe the Government will take this to its logical end. All this could take a few years, but the effort will be well worth it.
True, there are some short term pains, like people having to stand in long queues, GDP suffering a dip, etc. Extrapolating the GDP of the previous quarters, the dip due to demonetisation can only be partly attributable to demonetisation, the rest being due to a sliding economy left behind by the UPA Government, mainly in the form of a large % of unchecked black economy, unrecognised NPAs in banks, falling employment, policy paralysis, etc. In the above context, one can question the timing of demonetisation, but perhaps, any timing can be questioned.
In either case, the IT earnings of the Government would increase every year. Reducing black money significantly will also lead to increased indirect tax collections. Surely, such outcomes will be better than one time pains of demonetisation.
Coming to the 100+ lives lost in queues, surely it is unfortunate, but we should compare it with the lakhs of lives that could be saved in the coming years due to increased tax collections which could be spent in healthcare, education, agriculture, etc.
On the small value of fake currency detected, we don’t expect fake currency peddlers to deposit it. Do we? On fake currency of the new notes have started surfacing early, this is concerning, and RBI and the Government should find ways to arrest it. On terror funding, though the Government claims to have arrested it significantly, this needs to be established. There can be no let-up.
On movement toward ‘less cash’ economy, the cash component of the economy has reduced, more particularly high denomination notes as % of the cash economy, which is promising. But it’s too early to say. Real estate prices have come down substantially; we have to wait and watch for how long this holds.
Lending to business to spur growth hasn’t started happening due to PSU Bank NPAs; though the latter is not a consequence of demonetisation, it is the Government which has to address both the issues. There’s lack of clarity on how much loan has been given as micro Mudra loans post-demonetisation, and how many jobs have been created. The Government should clarify.
On the larger issue of job creation, this is the biggest failing of the Government, and demonetisation has impacted it further adversely.
The actions of the Government on the political funding front, which is linked to corruption, are unconvincing. I hope the Government will take more serious steps to check this.
The Government says demonetised cash deposit of about Rs 2.85 Lakh Crores is suspect. Now, not only will it get a large part of this money back as tax and penalty, but also these black money holders would have to either come clean in future & pay taxes on their entire income or remain suspect in the eyes of the Government for ever.
In either case, the IT earnings of the Government would increase every year. Reducing black money significantly will also lead to increased indirect tax collections. Surely, such outcomes will be better than one time pains of demonetisation.
Of course, there would have been a large amount of black money converted to white through mules, which the Government may not be able to detect. But even in such cases, the black money holders would have been rendered poetic justice, as they would have paid a substantial amount of commission to the poor Jan Dhan Account holders.
Another criticism is that the pains of demonetisation are far higher than the gains. This again is fallacious. Demonetisation was like an investment. Its gains will be available in all the future years. Like investing Rs 100 one time to earn a profit of Rs 20 every year. So, counting the gains in just the first year to assess if the investment in demonetisation was worth it is short-sighted and unfair.
When a cancer patient is surgically operated, surgery surely hurts, and the recovery period is also painful. You don’t blame the surgeon for the pains, do you?
Note:
1. Text in Blue points to additional data on the topic.
2. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.
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[…] ‘Demonetisation’ and GST implementation received thumbs-down among Gujarati business community, but Modi was willing to take that risk, and these are one-off measures anyway. […]
This article is a logically economic article which has braved to go against the unthinking, doubting Thomases. Recovering black money from Switzerland etc in a demonetisation debate proves how naive and ignorant some people are. NaMo is already doing that through far-reaching negotiations with the countries concerned on a separate level, not to be confused with demonetisation.The crux of success or failure of demonetisation lies in the 14 or so lakh accounts where amounts deposited do conform to their tax returns, and the 2.85 lakh crores of deposits said to be in their name.
An idiotic analysis. Like the move itself, it is long on assertion, short on fact. Demonetization is not a defining move like the 1991 liberalization, which was transformative. If one cannot see the results soon, by 2019 there will be too many other variables to read the impact correctly – who knows how many monsoons, the introduction GST, etc. The author should join the WhatsApp brigade of PMO. One had hoped for major unearthing of political black money and the return of Swiss deposits, all one has seen so far is a minor slap on the wrist for deposits by industrialists. What a lost opportunity.
1. Short on fact? Facts should be countered with facts, not opinions. Objective people counter ‘short on fact’ with facts & reason. Opinionated people choose epithets (like ‘idiotic analysis’), which reflect not on the person targeted, but on the one who targets.
2. Long on assertion? Concluding already that Demo is a failure is long on assertion, or saying that it will take a few years to know the actual impact of Demo? Don’t infrastructure like building roads, railways, irrigation factilties take time to yield results? When it is known clearly that Demo will result in short term pains, why judge it in the short term, unless the goal is to denounce it anyway?
3. “If one cannot see the results soon, by 2019 there will be too many other variables to read the impact correctly”. So, will a long term measure become a short term one? This argument is true with infrastructure as well; so, do you judge the impact of infrastructure in the short term?
4. I haven’t concluded that Demo is a success; I have only opined that it has the potential for success. The Govt still has to convert the potential to performance. I’m willing to give time till 2019 Elections for the Govt to demonstrate that they will make a success of Demo. Common people are willing to wait. This is clear from the confusion on the ranks of the opposition.
govt collecting a lot of money in terms of taxes. the petrol price is way too high and its keep increasing.
there is no visibility of govt schemes working on ground. no one feels the work anywhere except some articles. this is really worrying to learn that the effect of whatever the good schemes you guys are discussing. looks people slowly getting abandoned by this govt despite having huge mandate..
Fair points made.
On petrochemical prices, it was a deft move to take advantage of fluctuating (mostly falling) prices, to tax heavily as there’s a need to check it, being heavily import dependent.
True, the Govt has to bring higher visibility of its schemes working on ground. Surely, there’s an increasing feeling (though not among the majority of people) of things not working on ground, which the Govt needs to address, not merely thru PR, but by performance.
“Like investing Rs 100 one time to earn a profit of Rs 20 every year”- any idea when the profits would be generated???
Stop peddling theories to justify a monumental blunder
By pre-judging a long term measure, can’t you be accused of peddling NOT EVEN theories but mere opinions (that too in a minority) to condemn Demo as a monumental blunder?
Did not understand the poetic justice part. Surely the black money holder has gotten his money back from the jan dhan account holder afer the cash restrictions were removed.
They had to shell out significant % as Commission to the mules (who are poor). This is what I’d meant. Though the money may not have come to the Govt, it went to some poor people.
Country was ruined by earlier leaders for over 60 years. Now, at least, some one is trying to do something and we must appreciate the effort. As long as people don’t have social responsibility and criticize based on party, religion, caste or creed, no good can happen.
India has been scammed big time. Your efforts for damage control are futile. Work harder.
A news blog site is like a Thermometer. It can only flag an illness. You can do your bit too. Write to you Lok Sabha MP and ask him/ her to raise the issue in the Parliament.
Very well written. Remember before NoteBan many of the foreign routes of exit have been either sealed or made visible. Now once the potential black money holders are identified, go after their other assets and increase the pain for them. Second keep removing high denomination notes, so that the pain to hoard is bigger, so that people give up on hoarding (at least majority of them). This will also push for more less-cash economy.
I believe Modi is thinking very bold and innovative, if some of these actions pay off, then India will see huge benefit to the nation and future generation.
Lesser more effective way is to target big fishes holding unaccounted money/properties in foreign banks.I think DrSwamy’s suggestions sounds good and plausible.Instead this govt. is seeking headlines by going after smaller crooks.Ultimately none will be caught,all will make money by getting a cut and looking other way.Fighting corruption starts from the very top not at middle or bottom but the those who are in power to make such decisions should have honesty,education and cajones.I am sure most of the money that came into system will vanish once again as cash to kept under mattresses.
I think both are happening… be it Lalu, PC, DKS, Maya or Jaya. The only ones left out are Pawar, Badals and Gowdas. Secondly, you have to go after the termites within our systems, who are small fish but do lot of damage to our nation. That’s where 18 lakh accounts are under scrutiny.