The government has claimed that problems due to scrapping of notes are short term & people are willing tocooperate to cleanse the country of black money. But the veracity of these claims needs to be meticulouslyscrutinized apart from the need to analyze short & long-term consequences of the policy

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|| ZUHAIB YOUSF MIR

                  Without any warning exterminating86 percent of thecurrency in the country wasthe biggest financial surprise that anygovernment has given since 1947, theyear that marked independence ofIndia. This has caused a misbalancein the economy; the demand for thegoods and services has plummetedand at least 70 deaths have takenplace nationwide. Censuring demonetizationthe deputy leader of the oppositionof the Rajya Sabha Anand Sharmacalled it the worst form of financialanarchy and undeclared financialemergency that the country has everwitnessed. The government says thatthe perils are short term and peopleare willing to deal with it to cleansethe country but the veracity of theseneeds to be meticulously scrutinizedand understood well. We also need toanalyze the short term and long-termconsequences of such a policy.The long-term objectivemust be to get rid of corruption,tax evasion and the generation ofblack income. Demonetization onlytargets that part of existing blackwealth which is held in cash.

Some economists have beenarguing that introduction of Rs2000 note may increase the blackmoney twice than that of present.If the larger denomination is Rs500 that may show some effect tocurb the black money.

                It doesnot affect the continuous flow ofblack income and the corruption/tax evasion, which produces it andin many ways is at the center of thecorruption problem.The scrapping of the higher denominationnotes of 500 and 1000 rupeeshas caused a lot of discomfort to thepeople of the country and has hit thedaily wagers the most. Because theyhave to now select between earningthe livelihood or going to the bank todeposit or withdraw cash. By exterminatingthe notes the informal sector,which constitutes of more than 90percent of the employment, will take ablow and will substantially reduce thegrowth.People might be enthusedabout demonetization thinking thatthose with hoards of cash will not beable to exchange it in the banks fornew notes, and will therefore losetheir dirty money. This group includesbusinessmen, or politicians (either ontheir own behalf or on behalf of politicalparties), or bribe-taking bureaucrats.The public will certainly applaudtheir loss. However, much of this maybe laundered. Since the notes will bevalueless after 30 December, holdersof illegitimate cash will be willing tooffer high commission rates, or evenmore as the deadline approaches tooffload the cash. There is also an argumentbeing put forth that demonetizationmove itself stood irrelevantas black money is no longer hidden intrunks, but lies openly in the form ofgold and property and in several ‘fake’bank accounts. Black money is basicallyundeclared money.

            It is generated either by illegal activities or by legal activities that are not reported to the government. Therefore, this money is not accounted for in taxes. Black money, economists argue, doesn’t necessarily mean that it is stashed in someone’s mattress. Often a large part of it is in circulation and sometimes it is actually the liquidity for a very large economy. In July 2010, the World Bank estimated that the weighted average size of the “shadow economy” of India (as a percentage of the GDP) was 20.7% in 1999 and 23.2% in 2007. The report also points out that the likelihood of people – tax evaders and corrupt public officials – stashing cash in their homes is very less because of sheer logistics. Rs 1 crore in Rs 1,000 notes weighs 13kg and requires space of at least one sq ft. Some economists have also been arguing that that the introduction of Rs 2000 note may increase the black money twice than that of present. If the larger denomination is Rs 500 that may show some effect to curb the black money which is being circulated without any fear in the market. It has been reported that given the capacity limits at the two printing presses, which can print the high-value notes, it will take until May 2017 to replace all notes.

            This means to get the economy to the normal level of functioning it will take till May 2017 and also the distortion that this policy has created is going to be offset not only by reduced GDP in the subsequent year but also will take a long time to breakeven. Estimates for gross domestic product (GDP) growth in FY17 from financial analysts vary from a low of 3.5% to a range of 5.5- 6.5%. Montek Singh Aluwalia in his article to a leading newspaper said “Since the slowdown will be concentrated in sectors which are more employment-intensive, the impact on low-end employment will be greater than on overall GDP. This raises the issue whether the slowdown should be offset by counter-cyclical additional expenditure on road construction and railways.” Things could have been managed better if the government would have taken into consideration that banks should be equipped with enough cash on a proactive basis, the fact that the season is of marriages therefore the policy could be deferred to March next year and the fact that the season of new crop has just begun and the farmer will require hard workable cash in his hands for fetching seeds and other farm items. The farmer though found himself with sufficient cash from the previous crop but of no avail. I would like to underscore some of the recommendations that Aluawalia suggested to curb the menace of black money from its core, which could be beneficial over time.

              “Reducing discretion in both the Central and state governments and increasing transparency and accountability especially where the financial amounts involved are large. The biggest area of discretion relates to land and land use. Reforming the system of tax administration, including reorganizing, strengthening and modernizing the Central Board of Excise and Customs/Central Board of Direct Taxes. Lowering tax rates and simplifying the tax system to improve compliance. The goods and services tax (GST) to be introduced shortly was an ideal opportunity, but the proposal finally approved by the GST council has far too many rates and exemptions. Finally, it is absolutely essential to start making a serious effort at reforming the system of electoral funding, including introducing transparency in party finances. Businessmen routinely say that they are forced to generate black money to meet the demands of the political system and also the demands of the bureaucracy, which has arbitrary powers, which can bring business to a halt”. Advancement on these measures being completely dispassionate about the politics of elections that are nearing in 2017 in various states and taking into considerations all the social assessments before implementing any policy would make a real contribution to reducing the long- term gain of reducing the generation of black income over time. The BJP may be the final loser if the Centre fails to stop the confusion arising from demonetization.

The long-term objective must be to get rid of corruption, tax evasion and generation of black income. But demonetization only targets that part of existing black wealth which is held in cash