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Demonetisation is draining the swamp of illegal incomes and unaccounted for cash

The huge popular support for demonetisation shows that ordinary Indians want to lead an honest life and want an end to corruption that was threatening to become all pervasive.

opinion Updated: Aug 31, 2017 18:19 IST
Demonetisation,RBI,Note ban
Demonetisation was intended to drain the stinking swamp of illegal incomes and unaccounted for cash in the economy(HT)

A single statistic is being used by critics to argue that demonetisation was a disaster. However, the fact disclosed by the Reserve Bank of India, that of the Rs 15.44 lakh crore in circulation in Rs 1,000 and Rs 500 notes on the day demonetisation was announced, Rs 15.28 lakh crore was deposited into bank accounts, is hardly sufficient to damn demonetisation. Any fair and accurate assessment requires an analysis of facts that lie beyond one statistic. Ground reality proves the critics wrong.

Demonetisation was intended to drain the stinking swamp of illegal incomes and unaccounted for cash in the economy. Without draining this swamp or in other words striking at the stock of ‘black money’, no amount of effort to eliminate illegal incomes by improving the flows would have been effective. Given that there are 18 lakh accounts with dubious deposits with cumulative deposits of over Rs 3 lakh crore, the swamp of black money has been largely drained. Yes this money has not been burnt in bonfires or dumped in rivers, but it is now surely and securely in the sights of the tax authorities. Of this Rs 29,000 crore has already been identified as undisclosed income admitted and undisclosed income detected. Surely, this huge wealth, hitherto unaccounted, is tethered in identified bank deposits and the Central Board of Direct Taxes, which has its job cut out, should go after it. Demonetisation has hit the black economy rather hard.

Demonetisation has had a positive impact on the macro economy. The sucking out of a huge amount of black money circulating in cash led to a drop in conspicuous consumption and speculation in key markets, including real estate. The result was that consumer price inflation fell to a record low, from 4.2% in the month before demonetisation to just 1.54% in June 2017, six months after the exercise of demonetisation and remonetisation had been completed. Apart from benefitting poor consumers directly, this sharp fall in inflation has had other spill over effects including a reduction in interest rates by the RBI, which will boost private investment.

The benefits of lower inflation, lower interest rates and less speculation in real estate have directly benefitted both the neo-middle and poor. The moderation in real estate prices combined with a reduction in interest rates after demonetisation will enable many more in the neo-middle class to buy homes at affordable prices. Let us not forget that it is the poor who bear the brunt of corruption in the delivery of various public services and benefits. They also bear the consequences of tax evasion, which eats away at the resources the government needs to invest in the poor. By putting a dagger through the heart of corruption and illicit wealth accumulation, demonetisation has gained unprecedented support among India’s most vulnerable.

Individuals who have deposited large sums of cash will have to explain how they were in possession of that cash and will have to pay tax and penalties on unaccounted wealth. This isn’t about a one-time bounty in tax collections. Already, there has been an unprecedented increase of a whopping 25.4% in the number of personal income tax payers. This will help alleviate India’s terribly low tax-GDP ratio of around 18 percent of GDP (the average in OECD countries is almost double that).

The fallibility of the ‘system’ and the ingenuity of tax evaders and black money hoarders enabled much of this black money to be laundered into bank accounts. But that is not a failure of demonetisation. It only shows the extent of corruption in India’s institutions and individuals. This is the task at hand: To improve governance and root out corruption lock, stock and barrel. Demonetisation is the much needed sunlight on India’s black economy, which will disinfect it of its corrupt excesses. The critics do not want to see this. The huge popular support for demonetisation shows that ordinary Indians want to lead an honest life and want an end to corruption that was threatening to become all pervasive.

It would not be wrong to say that country has moved on to a much cleaner, transparent and honest system. Benefits of these may not be visible to some people. The next generation will view November 8, 2016, with a great sense of pride as it will have provided them a fair and honest system to live and work in.

Rajiv Kumar is founder director, Pahle India Foundation. He takes over as vice-chairman NITI Aayog on September 1, 2017

The views expressed are personal

First Published: Aug 31, 2017 16:47 IST