Demonetization: Pain or gain?

Mere demonetization would not serve the purpose, it would have to be taken in conjunction with other measures to correct systemic faults and not just destruction of cash


The demonetization move itself would target at the most 5% of the population, while the pain will be felt by 95%, albeit for a few days. Photo: PTI
The demonetization move itself would target at the most 5% of the population, while the pain will be felt by 95%, albeit for a few days. Photo: PTI

Most of the country and even foreigners are going gaga over the move by the government to demonetize high-denomination notes. A presumption has been made that they mostly reflect black money or unaccounted wealth. A bold move indeed and there are many who have been caught unawares with a bagful of notes. However, the question is: does it fundamentally change the dynamic of corruption or does it have only cosmetic value? Here is a look at it from a slightly different perspective.

Unaccounted wealth in the form of cash stashed away is only the tip of the iceberg, so to speak. The move itself would target at the most 5% of the population, while the pain will be felt by 95%, albeit for a few days. Take the example of the daily wage earner who does not get paid and cannot feed his family, as cash is not available. Or the rehriwalla who goes around without selling his wares which could be perishable. For them, it was more like carpet-bombing on the cash economy rather than a surgical strike on black money! It’s a predominately cash economy without access to plastic money or banks. As someone remarked, “Has the Indian economy gone on holiday” for the past few days, and maybe another week or so? What of the consequences? Consider the number of man-hours lost with people standing in long queues and often coming back disappointed as the branch ran out of currency. But the people say that they don’t mind the pain as long as the ‘black’ money goes extinct.

Really? Is it that simple? This cash is only the tip of the iceberg and most of the parallel economy is embedded in real estate/jewellery/bullion or in tax havens. Money is always being USED and very little is wasted by keeping it idle. This move is akin to giving an aspirin to a sick person to cool the temperature without treating the underlying disease. What if the pain is not just long lines, but a sharp downturn in growth or even contraction? What if the pain is less job growth? What if the pain is to drive the ‘black’ money deeper underground?

The disease is the system itself which feeds a parallel economy. The major contributors are:

* Elections and the loads of cash needed for canvassing. Solution: can they be funded by the state or the expenditure be closely monitored?

* Real estate and the cash element in almost all transactions. Circle rates do not reflect the real cost of the property which is almost universally known in the locality. The financial intelligence wing should be able to gather this information and use it.

* Wedding expenditure or let’s call it an industry with all stakeholders taking a cut and the consequent need to keep cash. We could clamp down on this without too much ado.

* Rent-seeking attitude of many government departments wanting a handout for doing their job or ignoring contraventions. The list is endless, and needless to say, the cure has to come from the top. Example: everyone knows that it is almost impossible to get a completion certificate for a new construction in Delhi and yet the racket continues to flourish. Hence, the need to keep cash on hand unless timelines are set to decide.

* Non-issue of bills of sale or inflating purchases is the classic way of suppressing income. Hopefully, with the advent of the goods and services tax, the need to take credit shall minimize this.

Criminal activity covering a whole range of rackets would have to be tackled and political patronage withdrawn.

Therefore, mere demonetization would not serve the purpose. It would have to be taken in conjunction with other measures to correct systemic faults and not just the present isolated destruction of cash. This would only be a temporary relief (laudable that fake currency would be destroyed), but it would not put an end to the future generation of black money.

Even as I write, numerous fellows with IDs are being deployed to encash Rs4,000 repeatedly and the gold/bullion dealers have already made a killing. Another window is the deposit of Rs2 lakh, which would go under the radar, and many would oblige for a fee.

While in the Central Board of Direct Taxes, I had recommended the adoption of the South Korean cash card system. Perhaps, the argument then that we did not have the infrastructure was credible, but the country may be ready for it now. South Korea had hugely augmented its tax collections in the last Asian crisis through proper reporting of expenditure even in cash. Swiping a card at a point of sale could capture all expenditure—above $5/7, made by cash. We could set the limit at Rs30,000 and use PAN for reporting.

Of course, such a system would need augmenting with structural reforms of the real estate sector, political party financing and other sources of black money. As it is, demonetization is a red herring with real pain for those who can least carry the burden.

B.M. Singh is former chairman of the Central Board of Direct Taxes.

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