Much before economists like Jagdish Bhagwati and Arvind Panagariya weighed in favour of Narendra Modi’s policies as Gujarat chief minister, Bibek Debroy stirred a hornet’s nest by praising the Gujarat development model. Debroy was then with the Rajiv Gandhi Institute of Contemporary Studies (RGICS), a Congress think tank. Needless to say, Debroy had to quit. But that did not stop him from speaking his mind. Debroy drew close to Modi prior to the 2014 Lok Sabha elections and played a critical role in shaping his economic policies. He was drafted as a member of the Niti Aayog after the extinction of the Planning Commission. In the meantime, he was tasked with reviewing the functioning of Indian Railways.
Debroy now wears many hats, one of them as defender of demonetisation. He has been valiantly defending the government’s move to make currency notes of denomination Rs 500 and Rs 1000 illegal tender. He says that it is just the beginning of a clean up of the entire economic ecosystem. In a wide-ranging interview, Debroy explains the rationale and the long-term impact of the move. Here are the edited excerpts:
As we approach the 50-day demonetisation deadline, can you explain its objectives, benefits and travails that the exercise entailed? As an economist and policy analyst, how do you sum it up?
One should not look at 8 November (the day Prime Minister Narendra Modi announced demonetisation) in isolation. The reason I am mentioning this is because there are various other things that have happened outside 8 November and will continue to happen outside November 8. So, the day should be considered from this broader perspective. Let me give some examples of that.
First, I’ll take up the issue of creation of new black income (in light of the strong criticism of demonetisation that it will not stop the creation of new black income – Ed). I am deliberately using the phrase ‘black income’ instead of ‘black money’ because we are talking about specifics and from an economist’s point of view there is wealth that is stock — gold, real estate, etc — and there is income that is flow (cash). 8 November was not meant to address the issue of creation of new black income.
There are other instruments to take care of that, like negotiating and re-negotiating agreements with Mauritius. This has already happened. Take for instance the restriction on cash transactions above Rs 20,000. Take something like the Real Estate Bill which, among other things, promises to transform the real estate sector from being unorganised to organised. It will not happen overnight but over a period of time. The prime minister has already indicated that many such measures will be introduced. And, remember, all this is happening on the back of an income declaration scheme that ended on 30 September.
That scheme was specifically meant for a greater scrutiny of people who might have had black income. So when people criticise demonetisation for failing to check the creation of new black income they fail to understand that nobody is saying that this is the only way all the issues can be addressed.
Now, let’s turn to the next serious criticism pertaining to the definition of what is ‘black’ money. There are two different uses of the term ‘black’. They are not quite the same. The first refers to money earned through illegal activities such as crime or drugs. The second type of black is when the activity is not illegal. So the income generation is perfectly legal but the tax that ought to be paid was not paid. Nobody is denying that black exists in non-cash forms like gold or property. There are instruments that have been introduced to tackle this and will continue to be introduced. Just because a substantial part of this black income is in other forms does not mean that it (the matter of black income) should not be addressed.
Let’s take up the third big criticism of demonetisation about cash vs cashless. In India cash is used substantially. And it is obvious as India is not a developed country. No one is expecting the use of cash in India to disappear overnight. But look at the ratios. The cash-GDP ratio in India even till last year was 13 percent. Some 15 years ago it was nine percent. Somebody needs to explain how this ratio increased from nine percent to 13 percent. Even if I assume that we need cash, it should be understood that when a country develops the use of cash reduces. Then how and why did we witness this increase?
Look at countries like Bangladesh, Sri Lanka and Pakistan. What is the cash-GDP ratio in Bangladesh and Sri Lanka? It is five percent or three percent. Even in Pakistan it is nine percent. So let us accept that there is too much cash around. Let us also accept that there have been deliberate compulsions to use cash. Take for example the Payment of Wages Act. Section 6 of the Act, which has been there for years, has said you must pay wages in cash unless you have concurrence from the employee not to do so. Who will do so? Why should we have such a rule in this age? It is only now that things have changed; it should have been done years ago.
And take for instance the high fees on non-cash modes. Someone should have objected to the rates they charge. So let us also recognise that there have been disincentives to using cash. Let us also remember that Jan Dhan Yojna accounts have already happened. So we have now more than 260 million accounts and many have RuPay cards. But sadly for them it is just a piece of plastic that will be used at ATMs as they have not been still educated and convinced that these RuPay card can be used for something else also.
Critics may point at the unbanked population of India and say that they don’t believe in the Jan Dhan figures. My response is that fine, don’t believe in these figures. But here is the survey done in August, not by government but by a private institution, and it states that 97 to 98 percent of India’s population — both urban and rural — has bank accounts. Now, if one says that all of them are not using the bank accounts, I may agree with it. But don’t say that they don’t have bank accounts.
How much exactly do the currency notes of Rs 500 and Rs 1000 account for in the economy? And how much of it have we got back?
There is a lot of confusion around as people are using two different bases. One is the RBI balance sheet figure which is slightly old and which puts the number at Rs 14 lakh crore. The other one is the figure on 8 November. It is the latest figure and it puts the number at almost Rs 16 lakh crore.
Let’s stick to Rs 16 lakh crore base. Now out of this how much was black? How much is going to come back into the system? To the best of my understanding no one in the government has predicted or projected anything. How much has already come in we don’t really know. There are all kinds of figures floating around. These figures may not always be final.
Let’s take the example of fake currency. Fake currency check goes through three different layers. Once it has gone through all three it is very unlikely that it will be deposited in the banking system. But today when you are looking at the figures it is perfectly possible that fake currency was deposited earlier.
Alternatively, you go and take old notes at petrol pumps. It may be showing up in the accounts that petrol pumps maintain with the bank. It may also be showing up with the report that BPCL is giving to the government. So until the figures are final one real does not know.
But the last figure I know is Rs 12 to 12.5 lakh crore. Which means, I personally think, that most people who were going to deposit it have already done so. Even if I accept that Rs 14 lakh crore comes in by the end of the month, the remaining Rs two lakh crore is not an indicator of success or failure. A lot of criticism is happening that only Rs two lakh crore will be left. To the best of my knowledge, no one in the government has said that it is the criteria of success. Because, the money that is coming into the system has not become white. It will invite taxes and penalties if required and will have deeper scrutiny. Just because it is in the banking system does not mean it is legitimate.
I mentioned earlier that people who are holding cash are being dissuaded to do so. So it is good that it comes into the system. I think it is a success as people are realising that this initiative is a serious one. So there is not much point in my hanging on to cash.
To my understanding it is an attempt at cleaning up the entire system. So if I look at it narrowly just from an economist’s point of view, I am missing the true picture.
This is the beginning of an attempt to clean up the gold market. I am not talking about jewellery market, which is different. It is also an attempt to clean up the financing of capital market transactions and real estate. And also one has got electoral reforms as part of the debate agenda.
I am not saying that something substantial has happened but it is part of the discourse. It should be seen as part of the broader process. You can dispute the survey figures. One survey says that 60 percent people are supporting you, another says that 80 percent are backing you. What you find across all surveys is that a large number of people are supporting the measure and it is because, I feel, they have realised that 8 November is just a small piece in the process.
My last point is when you are doing something like this you can make perfect plans. But when you do perfect planning it becomes impossible to preserve secrecy. To preserve secrecy I may take some decisions, you in the same position may take some other decisions. It cannot be the case that my decisions will be perfect as I may not be able to assess all eventualities. But if you are in my place you might also take decisions that might not have been perfect.
Obviously there was inconvenience. Let me divide it into different parts. One, the task was to get enough new notes to banks; two, naturally when there is a shortage there will be rationing. So in this scenario it was decided to take smaller denomination notes to rural areas; and three, it is one thing to get the notes to the bank and it is another to take it to ATMs. As a government you do not have much of control on how the banks take the money to the ATMs because it is outsourced. So there was a problem with banks and ATMs. I think — purely anecdotally as there is no data — that the problem at the banks has become lesser day by day even in Delhi and Mumbai. ATMs, yes, there are still problems. I have no idea how long it will take.
From where did the word “windfall” gain currency in this entire exercise?
Right from the beginning I have followed what the finance minister and the finance ministry have been saying. I have seen that there was a recognition that there are three different channels through which money will come. One is the money which does return. This reduces the liabilities of RBI. When liabilities of the RBI are reduced that is not automatically the money that in any fraction has gone to or will go to the government. It is for RBI and finance ministry to take decisions. Today sitting here we do not know how this part will be handled.
The second part is that there will be some money that will come into the banks, mostly public sector banks. It will ease their stressed assets problems and to that extent it enables them to lend better. But again, the banks, even if they are public sector banks, are not the government.
The third is the money that actually comes into the consolidated fund of India through taxes penalties and other means.
Now I have two things to say on this. First, I have already mentioned the income declaration scheme. Over and above this, action has been taken by the income tax department. It has resulted in a lot of money coming in.
Second, when I declare Rs 100 as additional income then that entire Rs 100 is not revenue to the government. Only the taxes and penalties are revenue to it. It is this money that the government can use for different purposes. How the government chooses to use it we will know partly on 1 February (the day of the Union Budget). I said partly because we would not know the figure till the end of March, which is the window for voluntary declaration of undisclosed income. As far as windfall gain is concerned, I don’t think in the government has ever used this word.
When the prime minister announced demonetisation he laid down certain objectives: Black money, fake currency and tackling terrorist activities. But over the weeks it seems the goalposts have moved.
No, I don’t think the goalposts have moved. There were multiple objectives. I will give you an example. On this issue I have been giving interviews to different people. Somewhere I would have spoken something to one person responding to specific questions and I would have said something different to another, but that does not mean that my focus changed. You see it is not a single objective.A lot of people are referring only to what the prime minister said on or after 8 November. My request is that you look at what he has been saying earlier in his monthly radio broadcast Mann Ki Baat. This has been figuring in his speeches for quite some time.
It is not fair to say that goalposts are moving.
Take the case of fake currency. I don’t think that the issue is about the absolute value of fake currency. In 2014, the Indian Statistical Institute (ISI) put the value at Rs 400 crore. There is an Intelligence Bureau (IB) figure of Rs 2400 crore. It is not about what the exact value of fake currency is but to understand that it does not take a lot of money for a terrorist attack with a lot of undesirable consequences. Even Rs 10 crore is good enough to cause enough damage. If I am destroying the counterfeit apparatus today there is no surety that it will not reappear in future. It has to be a continuous process.
So you are saying that this talk of moving goalposts is not valid.
I think so. I have been listening to Modi. I think the most important objective here was to clean up the system.
Now the next strike in all probability will be on benami property. How do you think the government will be able to do this? How much impact will it have on real estate? Is there any assessment?
People have been complaining that the real estate sector has been destroyed because of demonetisation. I ask what has been destroyed? Is it the value of the property? Is it the registered value of the property? There is a big difference between the two. Is it the black component or the white component? And the invariable reaction of anyone I speak to on this is that what has been destroyed is the black component. In Delhi, 50 percent of transactions used to be in black and 50 percent in white. Right now the system is in shock but I am certain that when it is stable, it will no longer be 50 percent black and 50 percent white. All of it (black) may not disappear but it will be much lesser. Whenever Goods and Services Tax (GST) happens it will bring a lot more into the net. So it is part of the entire thing and not just November 8.
The political part — the elections etc — requires a debate. It is not easy. And you have to also see that because of this a lot of poor people have started using non-cash means. So what I am seeing, though it is difficult to get it quantified, is that in many ways middlemen are getting eliminated from the system.
How do you think it will impact the tax base?
Indirect taxes will increase because of GST. There is difference between tax avoidance and tax evasion. Tax avoidance is legal whereas tax evasion is illegal. So to broaden the direct income tax net, you need to take care of exemptions. Today when a chartered accountant is not paying his taxes it is not always the case that he is evading. Rather he might be having legitimate exemptions that he can avail. I have a feeling that in future there will be a greater degree of enforcement with regard to eliminating cash transactions in certain segments. My hunch is that the segments that will be made more accountable will be lawyers, chartered accountants and doctors.
There is another difficult issue that is linked to this: Taxing people in rural areas.
Technically, taxing agricultural income is a state subject but taxing non-agricultural income of the farmer is not a state subject. There is an issue there that is more about enforcement. So part of it is broadening the base, but also simultaneously ensuring that tax department, both direct and indirect, does not unnecessarily cause harassment to honest tax payers and I feel that we will see something on this line in the budget.
How do you react to reports of people illegally exchanging money? Do you feel that banks did not behave in the manner they were supposed to?
One of the channels that was misused quite a bit was exchange, which is really an RBI thing. I think there were three problems with banks. First, they were not very vigilant about the functioning of the ATMs. They were talking about whether the ATMs were calibrated, but I am talking about how many ATMs were working. Second, from the second day we knew from newspapers that some bank officials, though most they worked really hard, connived. How do we know that they connived? Because they have been caught. So there is a positive way also to look at this.
I am a little confused about the third as there is lack of information about it. There is a shortage of notes. When there is a shortage, there is a certain principle on which distribution is made. What is the principle that RBI follows in distributing notes to different banks and what is the principle that banks follow in distributing to different ATMs? I don’t have any information about this but I don’t think that this is done in a very rational kind of way. If a bank like SBI has many ATMs then the bank should have information on which ATM is used to what extent and the distribution should have taken place accordingly. Am I (as a bank) doing this with efficiency? I don’t think so.
Even in case of honesty I am not very sure that it was very efficiently followed. But this is my analysis and is purely anecdotal. I often take this route between Khelgaon and Aurobindo Marg and there are roughly 20 ATMs. Two days ago I found that 10 of them were working. If there is a general shortage then all should not be working. So I think it should be probed how they allocate money.
But there were so many reports about how old currency was exchanged for commission of 10 percent, 15 percent which came down to five percent later.
If they have got less money there is some destruction. There has been some tracking of this at aggregate level. Initially, when it happened it was happening at 35 percent. It has not come down at five percent. It has come down at 10-14 level. There is still destruction.
How do you react to the opinion emerging from the world around on demonetisation, some of them are calling it an ‘immoral act’.
I don’t understand what is immoral here. Let us get the principles clear. Your money is in the bank. No one said that you cannot use that money. All that has been said is that there is a limit on withdrawal. You want to pay through cheque you can do that freely. You do digital transactions you are free to do that. So the first principle of criticism that I am being deprived of my property is factually incorrect. Please understand that someone who is based abroad does not know what is happening on ground here. They are forming their opinion on what you people are writing here in Indian media.
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Updated Date: Dec 28, 2016 13:15:07 IST