Disequilibrium: Demonising Demonetisation

Tags: Opinion

The benefits of demonetisation will far outweigh the short term dislocation and disruption as India makes its tryst with a cashless society

<b>Disequilibrium:</b> Demonising Demonetisation
One would like to believe that the chalice is no longer poisoned but brimming with nectar. The government's war on black money has to be viewed in continuum. It began with a morally corrosive overseas amnesty scheme, which for some strange reason failed abysmally, primarily because fear didn't stalk the perpetrator’s hearts and minds in far away lands. The Income Declaration Scheme (IDS) this year was also middling along till the department of Income Tax put the squeeze on errant offenders, armed as it was, with a database. As the dragnet closed in, the last two days saw a windfall and close to $10 billion was flushed out. Between the Black Money Act and the Benami Transactions Act, which came into effect from November 1, there is no gainsaying that the government is sincere about unearthing black stash. Of course, there is massive disruption and dislocation as consumption has a taken a huge hit. Cash has virtually disappeared from the economy. People towards the bottom of the pyramid are worst hit for their daily lives require lucre to lubricate. More than that, it reboots the economy. Not only does it give the ruling dispensation under PM Modi enormous brownie points, it has a disinflationary impulse and is a big positive for the debilitating fiscal position. It is negative for growth and consumption but since the banking system will be flush with liquidity, it will have a deleterious impact on the interest rate cycle, which hopefully will now have a downward bias. The immediate effect will be visible on December 7 RBI policy review, which should see another 25 bips cut. The RBI itself stands to benefit since excess liquidity will ensure that it can stop regular open market operations. Moreover, the bottom has fallen out of the stone pelting economy and the Valley of Kashmir has seen the intifada evaporate into thin air. Terror financing too will feel the pinch as the counterfeiting industry based in Pakistan has been blown out of the water.

Almost three years ago, Nitin Gadkari, then BJP party president, invited a handful of economic journos and some economists for a presentation at his LBZ residence. The presentation was made by a team from Pune-based group called ‘Arthakranti Sansthan’ and it vociferously argued for various measures to curtail the breeding of black money. While some of his points made sense, most seemed revolutionary and very honestly many of us laughed them out of the room. Anil Bokil, a non-descript man was the centrifugal force behind what appeared to be a Sangh affiliate. And though one wrote about some of his proposals, one forgot him and his Sansthan till the PM decided to address the nation and drop a bombshell. Then Bokil's presentation was rewound in my memory recess and many of his radical measures came back in a flash. Susbsquently, it emerged that Bokil had recently met the PM and argued for the demonetisation theory. PM Modi evinced interest in Bokil's theories and the conversation lasted a couple of hours. The sum and substance of the Arthakranti proposal lists a five-point action that guarantees “solution of black money generation, price rise and inflation, corruption, fiscal deficit, unemployment, ransom, GDP and industrial growth, terrorism and good governance”. Subsequently, a video showing Bokil explaining how demonetising high-value currency notes will help curb the black money problem emerged. His take was that demonetisation will ensure people will be forced to exchange their money at banks, thus bringing them into the digital and financial system. The Sansathan is an economic advisory body constituted by a group of chartered accountants and engineers. Arthakranti's other proposals that balmy evening at Gadkari's house included: (See boxes: Arthakranti proposals & BTT most ludicrous)

A Banking Transaction Tax (BTT) appeared to be the most ludicrous move that day, Anil Bokil, however, argued vehemently that: Anyway to cut to the chase, Anil Bokil, who one thought was talking poppycock because of the sheer gamut of disruptive ideation has returned to haunt the lives of Indians. This doesn't take away the benefits that will accrue to the Indian economy over the medium term. Short-term pain will be replaced with far reaching ramifications. Black cash has to be flushed out of the system. As the Attorney General Mukul Rohatgi explained to this writer the money that doesn't return to the banking system from the Rs 17.77 lakh crore, which is in circulation will wipe out the government's gross borrowing of approximately Rs 6 lakh crore. What will not return to the banks is being quantified at Rs 6.25 lakh crore. RBI updated data reveals this. So, banks are already flush with liquidity provided by the returning deposits. Hence, deposit rates have been cut by banks unilaterally. The December policy review of the RBI may well see a rate cut and perhaps a few more thereafter. Lower interest rates will boost consumption and growth and also pump prime the embattled investment cycle. Was it a risky gamble, yes and no. For India is perpetually grappling with the black economy and this needed to be nailed. This is an IDS in a different garb, but far more effective as it impacts one and all.

Let us examine the global trend line in this war of black cash. The results are surprising and many countries have done much better than us. The closest parallel can be drawn with Indonesia, where an amnesty scheme both videshi and domestic in ongoing. Indonesia "is at the highest position" among them with revenue collection equivalent to 0.65 percent of gross domestic product. India received revenue representing 0.58 percent of GDP, Chile 0.62 percent, Italy 0.2 percent and South Africa 0.17 percent. The first phase of the scheme was gangbusters and Indonesia authorities are ecstatic. Indonesians declared a total of 3,516 trillion rupiah (S$368 billion) worth of assets, both at home and overseas. Which translates into the initiative already having achieved almost 90 per cent of its 4 quadrillion rupiah target in the first three months of the nine-month-long scheme, which officially kicked off only in mid-July. Straits Times reported that the taxman also collected 97 trillion rupiah, or 59 per cent of the 165 trillion rupiah in tax revenue Jakarta had hoped to raise. The only blemish was that just 135 trillion rupiah was repatriated from overseas. This was 14 per cent of the 937 trillion rupiah declared by taxpayers with assets abroad. Under the scheme, individuals enjoy preferential tax rates ranging from 2 per cent to 10 per cent, depending on when they declare, and whether the funds are repatriated. But assets that have been repatriated will need to be invested locally for a minimum of three years. The landmark tax-amnesty programme was touted by Jakarta as a silver bullet to help the country raise billions of dollars it needed to beef up a flagging state budget.

The scheme had a slow start. That prompted a blame game directed at Singapore, where wealthy Indonesians had stashed US$200 billion (S$272 billion) worth of assets. Some Indonesian officials accused Singapore of trying to undermine the tax amnesty over fears of an outflow of funds. But Singapore said it was a baseless allegation. Indonesian taxpayers, from tycoons such as Mr Aburizal Bakrie and the Riady family to thousands of middle-income folk, have since stepped up. Tens of thousands rushed to more than 340 tax offices across the country in recent days to sign up for the scheme. Director-general of taxes Ken Dwijugiasteadi told The Straits Times that some 341,110 taxpayers have signed up, including 15,000 new taxpayers. Analysts say most were probably eyeing the low tax rate offered in the first phase of the scheme, which ended at midnight.

Similarly, Bloomberg reported in August that Argentina plans to sell as much as $8 billion in bonds that pay little to no interest as one option for tax evaders seeking to repatriate money held abroad. Argentina will offer as much as $3 billion of three-year bonds that pay no interest and $5 billion of notes due in 2023 that pay 1 percent to tax evaders with undeclared assets overseas, according to the official gazette. That compares with an interest rate of 6.3 percent on overseas debt due in 2026. Argentines who want to come clean can also choose to pay taxes and penalties on the cash held abroad instead of buying bonds. The government may increase the size of the three-year bonds if it’s oversubscribed, but won’t reopen a new tranche of the seven-year bonds.

Ditto with South Africa where South African taxpayers are in a situation to regularise their undeclared offshore assets before the tax information will be exchanged, the window period being Oct 1, 2016 – March 31, 2017. So this phenomenon of black money is not something India is dealing with. Worldwide, there is a battleplan to bring to the surface illicit and illegal cash. India has a multi pronged fight on its hands - extremely large shadow economy, terror financing, counterfeiting from Pakistan infiltrating porous Nepal and Bangladesh borders. (See box: Tackling counterfeit menace)

Yes, there is a lot of pain, but most people remain supportive for their anger and aakrosh at black cash proponents is valid. Given India's narrow tax base and the fact that a mere 11 per cent of the 15 lakh individual tax payers cough up as much as 80 per cent of all taxes, this distortion only encourages the flow of black cash and the rapid growth of the shadow economy. Curtailing this and jamming it should be India's endeavour and as common folk one should support it. In any case, this transformative reform will only help in the journey, which culminates in a cashless society. One can argue that rural Bharat remains cash oriented and only urban agglomerates will see this metamorphosis, but between Jan Dhan, JanDhan-Adhaar Mobile (JAM) and Direct Benefit Transfer (DBT), the government is encouraging the avoidance of cash even in Bharat. Surely, there will be other measures announced in the next budget, which will encourage the use of plastic further.



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