GAUTAM MUKHERJEE
Into the second week after Prime Minister Narendra Modi’s shock demonetisation announcement, the emerging picture is most encouraging. Kept admirably secret, till 8 pm on November 8, despite some opposition insinuation to the contrary, it came as a surprise to almost everyone.
About rupees four lakh crores has been deposited into the banking system, since. The banks, flush with money, have cut their deposit and lending rates spontaneously, without prompting from the RBI. Early movers in this regard, include the SBI and Axis Bank.
Veteran banker KV Kamath expects the RBI to also cut its repo rate by 100 bps within 3-6 months, as inflation comes down further.
An estimated Rs 10 lakh crores is expected by December 30th, out of the Rs 15-16 lakh crore of the demonetised notes in circulation. And more to come in, funnelled directly into the RBI, by March 31st, 2017.
However, the Government is not keen to reward those who cannot explain where the money came from. In tandem with the frenetic banking, there are stepped up income tax raids on those suspected of hoarding large tranches of black money, indulging in hawala, counterfeiting, terrorism, money-laundering, extortion, drug and arms smuggling etc. These too have been yielding satisfying results.
Some reports suggest, a little improbably, that as much as four lakh crore rupees of the demonetised currency won’t be deposited at all, resulting in extinguishing of the equivalent liability at the RBI.
That terrorism financing has been badly hit is also immediately evident, in Kashmir, the bad-lands of Bengal, and the Maoist jungles of central India.
Good as all this sounds, this gargantuan exercise involving millions of citizens and massive disruption, would not have been undertaken at all, if it wasn’t part of a bigger plan.
The Modi Government knows full well that one time demonetisation is not a permanent solution for black money, counterfeiting, or corruption. The history of demonetisation, here in India, and elsewhere, tells us as much.
Meanwhile it appears to be wildly popular. Initially, the approval-rating was at 82 per cent, in an urban opinion poll conducted on the 8th and November 9. Another poll, conducted at the beginning of the new week, shows 86 per cent in favour.
The downside, of opposition political protests, would have you believe that it is a backfiring, chaotic, disaster. It is painted out to be anti-unorganised sector worker, daily wagers, the poor, the farmer, anti-old people, uncaring of the marriage and crop planting season, and so on.
There were long queues outside banks. Many ATMs were non-functioning for a while, while others could disburse only a paltry Rs.2,000 before recalibration. And yet, the public seems to have determinedly understood that the dislocation it is suffering will contribute to the greater good.
Scrapping the Rs 500 and Rs. 1,000 currency notes, audacious as it seems, comes as the latest in a series of actions. It started with the SIT on Black Money stashed abroad, and the Jan Dhan Yojana for the great unbanked, yielding over 25 crore new accounts, the authentication and linking with Aadhar cards, the introduction of universal insurance and pensions for the poor, the direct transmission of subsidies where applicable.
Then came the great push to harness multiple indirect taxes, largely evaded, into a hard won single GST, administered online, that will be very difficult to dodge when it becomes operational, by April 2017 or so.
The demonetisation, big as it is, with its multiple objectives, may be no more than a crucial pit-stop, towards getting the entire money using population into the banking universe, that currently has Rs. 100 lakh crores in deposits.
The Government has, we know, long been struggling to expand the income/corporate tax base, without much success. To abolish these, and related taxes, in favour of a single bank transaction tax, would therefore qualify as a major overhaul of the system.
If direct taxation is abolished, all money will be equal, readily banked, and productive. Tax evasion would become a thing of the past. And transaction taxes would actually garner much more from the entire bank using population.
Prime Minister Modi’s related proposals, aired afresh at an all-party meeting on the eve of the winter session of parliament, a couple of days ago, revived the idea of state-funded elections, and holding all of them-state/municipal elections, simultaneously, with the general elections.
Prime Minister Modi may well be keen on scrapping direct taxes, sometime before the code of conduct kicks in before the 2019 general elections.
The domestic effort to get people to declare concealed wealth, the Income Declaration Scheme (IDS), did very much better.
At Rs 65,000 crores declared, it has been the most successful scheme of its kind in India, even at a tax hit of 45 per cent.
Still, it left a lot of money out there, if various estimates on domestic black money are to be given credence.
Clearly, despite some challenges being experienced currently, the boost to the banking system, and the influx of cash into the official economy will, in the medium term, also boost the GDP.
With the advent of GST in place of multiple indirect taxes, and abolition of direct taxes in favour of a transaction tax, if it comes, India is sure to experience a decade or more of double digit growth.
This, backed by reduced inflation, low fiscal/current account deficits, no incentive to hold or hoard cash, and a stable currency, as contributing factors.
(The author is a columnist and commentator. Views expressed are his own)