At this stage, there appear to be no immediate tangible monetary gains of demonetisation in sight, hence the change in the primary narrative and target of Narendra Modi government’s major currency crackdown to cashless economy isn’t difficult to understand.
This is even more evident from Finance Minister Arun Jaitley’s presser on Thursday detailing government’s big package to push cashless transactions in the society. The announcement, mainly reduction in transaction charges on digital payments and tax rebates on smaller transactions makes it clear that the government intends to pursue the theme of cashless economy with more vigour in the days ahead.
Announcing the measures, Jaitley said the government will offer reduction of 0.75 percent on digital transactions for fuel purchase, similar discounts on suburban railways tickets, insurance policy payments, toll payments on national highways besides offering Rs10 lakh free insurance cover for travellers who book railway tickets through digital mode. The minister also announced the offering of free Rupay credit cards to farmers and two PoS terminals each to one lakh villages with population over 10,000. These measures are indeed positive to encourage more people do digital transactions and lessen the use of cash.
This new focus also reflects in prime minister’s recent speeches too. Marking the 30-day of demonetisation, the PM said, "We also have a historic opportunity to embrace increased cashless payments and integrate latest technology in economic transactions." This is something which he said in the last Mann Ki Baat programme too. Modi saluted people "for wholeheartedly participating in this ongoing Yagna against corruption, terrorism, and black money", and said, "government's decision has several gains for farmers, traders, labourers, who are the economic backbone of our nation." The shift in focus as 30 days of demonetisation gets over would likely raise further questions from the opposition. Modi's critics would perhaps want to know the status of the originally stated objectives of fighting black money, corruption and terror funding. This is particularly so when seen against the hardships majority of India’s poor have been pushed into due to this massive exercise in the economy.
But, there are reasons to believe that the shift in the government narrative to cashless economy is also due to the indications that the gains on black money wouldn't be major. Let’s set aside political claims and counter claims and look at this one month impartially. What are the salient features of one month of demonetisation?
On the negative side, there have been repeated flip-flops on rules, stories of cash crunch from across the country, the huge hit on rural economy and massive disruption of the informal sector that employs a majority of poor Indians giving them their livelihoods. On the positive side, we have seen a notable jump in non-cash transactions and the move has impacted the counterfeit note networks for now. After a month of demonetisation, the available data point out to the possibility that immediate gains from the drive are unlikely to be anything significant than one had hoped for. This is unless the government comes out with a big number on the amount of unaccounted cash uncovered and taxed to benefit the exchequer.
A cost-benefit analysis of demonetisation will have to be done once the government is done with the process and that’ll happen sooner than later. Unless there is a clear monetary gain at the end of the demonetisation exercise, the government will find it difficult to explain the timing and massively disruptive nature of the whole exercise, given the hit on the economy, which is difficult to estimate at this stage.
Speculations that the government will benefit from a "windfall" gain from RBI when a significant chunk of currency notes do not find their way back to the system, has ended after RBI governor Urjit Patel clarified that there is no plan to give any special dividend to the government.
Anyway, Patel’s clarification was irrelevant since almost Rs12 lakh crore money have come back to the banking system already (out of the Rs14 lakh crore demonetised).
Going by this pace, almost the entire money will come back to the banking system before the deadline to deposit old notes expires on 30 December. So what is the immediate monetary gain for the government now?
The only tangible benefit thus becomes the tax recovery from unaccounted cash deposits. If through the exercise, taxmen manage to get hoarders taxed for a substantial amount, the plan is a success, since that money is now taxed and up for productive use. The unaccounted cash could come back to the banking system either in the form of voluntary deposits or when the taxman knocks on the doors of tax evaders. In the first case, the tax and penalty will together be around 50 percent plus 25 percent of the deposits get locked for four years. If they get caught with the illegal cash, they will have to pay a penalty of 85 percent. Certainly, it isn’t an easy exercise for the taxman since the crooks know well how to keep their ill-gotten wealth safe, such as using benami accounts. Part of the reason why the government chose to offer an amnesty scheme to tax cheats is knowing this difficulty.
One should see government’s big push to cashless economy in this context. The government probably realises that at this stage putting the whole weight behind the cashless narrative is a safer bet rather than chasing the black money mirage, where a big success appears unlikely. Such a narrative will also have a revolutionary reform character. However, there are major challenges in aligning the consumer behaviour in favour of digital transactions in a country like India, where a majority of the poor still live in ash economy and initiatives such as two PoS terminals per village may not be effective enough. Even developed countries such as Singapore are still dependent on cash transactions to a significant extent is a proof that cash is something difficult to get rid of. Most experts agree that the change to cashless society should happen over a period of time, rather than being forced on the poor.
Updated Date: Feb 06, 2017 14:51:55 IST