If the demonetization move was a surgical strike on black money — a term the rendra Modi government seems particularly fond of — did it take out its intended target? In his joint address to Parliament at the start of the budget session, President Prab Mukherjee was highly approving of the move. He lauded demonetization as the latest of a series of moves by the NDA government against black money, corruption, counterfeit currency and terror fincing, coming as it does on the back of setting up an SIT on black money, passing of tough laws like Black Money (Undisclosed Foreign Income and Assets), Imposition of Tax Act, 2015, Bemi Transactions (Prohibition) Amendment Act, 2016, as well as treaties to share information on tax evaders with some key countries. Chief Economic Adviser Arvind Subramanian, presenting the Economic Survey for 2017 in Parliament, was broadly upbeat on currency ban effects, asserting that demonetization would shave off only 0.5% point from India’s growth rate. But his report has a full chapter on demonetization, where the attempt has been made to examine the impact of the Prime Minister’s decision to scrap high-denomition notes. Noting that demonetization is being undertaken as a ‘redistributive device to transfer illicit wealth from the rich to the rest, via the government’, the survey admits that in the short run, the costs are being borne to a great extent by the less well-off in the informal/cash-intensive sectors. “In one sense, this could be thought of as inefficient redistribution. So, if, subsidies have been an inefficient way of redistributing toward the poor, demonetization could be seen as an inefficient way of redistributing away from the rich,” the survey says. Those with undisclosed wealth used back dated receipts and various other means to launder their money — but according to the survey, they still suffered ‘substantial losses’ in terms of taxes or ‘conversion fees’ (high commissions charged by launderers to turn black money into white).
Overall, the survey argues that while it is too early to evaluate the full impact of demonetization — it has caused the money supply to contract (albeit only of its ‘cash component’), while functioning ‘like a tax’ on uccounted private wealth stored as cash, as well as on savings outside the formal fincial system. To make its case for demonetization, the survey has even tried to put a number to the probable amount of black money in the system prior to PM Modi’s shock November 8 announcement. Making projections of rates at which currency notes of some other countries were found to have been soiled or damaged and returned to their central banks — Economic Survey 2017 estimates that at least Rs 3 lakh crore, representing about 2% of India’s GDP, may have been potentially black. The underlying assumptions are that higher-value notes get soiled less as they are used less for transactions, and the ‘soil rate’ will be even lower if these are used to store black money. Earlier, opposition parties have been taking the government to task, alleging that over 90% of demonetized currency was back in the banks till December 2016. Their allegation is that while the black money hoarders maged to convert nearly all of their cash hoard into white, petty traders and unorganized laborers in particular and the poor in general have been made to suffer needlessly. With the Union Budget now banning cash transactions above Rs 3 lakh and promoting cashless initiatives, it remains to be seen whether the government succeeds in making a substantial difference to the PricewaterhouseCoopers estimate (in 2015) that 68% of total consumer transactions by value and 98% by volume in India, are carried out in the form of cash. The Income Tax department has now launched Operation Clean Money, using a new data-mining software to check on suspect bank deposits; around 18 lakh depositors are already said to have received calls from taxmen. Black money goes hand-in-hand with a predomintly cash economy, but areas like public procurement, fincial markets and real estate offer formidable challenges that the government will have to tackle head on.