Has demonetisation achieved any fiscal gains for economy? Jury is still out on that

One year after demonetisation was invoked, one is still is not sure about the final results as there are claims and counter claims on the efficacy of the same. Meanwhile another major reform goods and services tax (GST) has created considerable upheaval affecting probably the small and medium enterprised (SME) segment the most which was also buffeted considerably by the scrapping of high currency notes. Hence, at the end of the day, reaching any conclusion is at best a conjecture as certain crucial numbers on tax collections or additional tax payers who matter has not yet been put on the table. There is, however, some news that the income tax department has tracked transactions of some companies which probably cannot be accounted for which can run up to Rs 20,000 cr. However, this is still a news report and not a realization for the government.

Let us look at some of the possible parameters on which there are differing views. It has been stated that the number of tax assesses has increased sharply but at the same time the additional tax collected has not been provided. The information available till September shows that growth in direct tax collections is on the same path as before. Besides the budget did not state any quantum of additional taxation it expected to receive on account of better compliance. Therefore, interpretation will be ambivalent.

Second, there is a claim that the volume of digital transactions has increased sharply in this period. But those on the other side of the court argue that this is but natural because the base was nonexistent. Further, the monthly data show tapering of such transactions which can be expected because there is a cost attached to using this medium which is not so for cash. It can be further argued that since almost all cash came back for exchange during the two months as per RBI data, evidently there was not much black money stashed in cash except at the margin.

Representational image. Reuters.

Representational image. Reuters.

Third, those arguing that digitization as well as lower cash is the order today can say that presently the volume of currency is around 90 percent of what it was last year and has remained stable at this level. Therefore, at least 10 percent cash has been driven out. But it can be counter argued that this does not really indicate the success of digitization but has only pushed the excess cash held by households back into the banking system.

Have we become a morally speaking more ethical society? Here, too, it is hard to comment as at the ground level one still needs to pay bribes when dealing with government offices or the administration. While cash payments have come down for housing, business is down more on account of RERA which has come in post demonetisation.

Are people paying more taxes? One does not know because the numbers are not indicative of any sudden upsurge. Data on how much money was collected from the second income declaration scheme or on how much penalty has been imposed by the tax authorities on unexplained cash transactions have not yet been provided to gauge whether or not significant amount of black money resided in currency. The challenge here is that even if such notices are issued, it can get into litigation which can proceed in courts for several years by which time the result can never be known.

The answers are at best fuzzy on the four main objectives of demonetisation, three primary ones (black money, counterfeit and error funding) and one an afterthought (digitization). The fact that we have brought in even higher denomination currency indicates that the premise that black money was in high demonetisation was not considered to be the real reason behind bringing in demonetization.

Has there been any collateral damage? Those on the other side would say, yes. The poor were affected by shortage of cash to begin with. The SME sector was affected sharply with jobs being lost. Banks spent two full months with currency and then struggled with the Reserve Bank of India (RBI) to deal with excess deposits of Rs 4-5 lakh crore. RBI net surplus got affected by Rs 30,000 cr which fed into lower realization for the government’s non tax revenue. GDP growth has slowed down for sure for two quarters. For the year it was 7.1 percent which is 1 percent less than what it was in FY16. Given that everything was going right last year, the lower growth may be attributed to this reform.

Several industries were buffeted by lower demand where the final customer was the household like consumer goods, automobiles, real estate housing. The proponents would however argue that while these were short-term pains, conditions have evened out after one year and that things are looking positive. This cannot be denied. In fact, today the disruption caused by GST is a challenge and few enterprises are talking of demonetisation as the cash situation has returned to equilibrium.

Putting all these observations together, can we say anything definite?

First, the situation is definitely normal today after the tribulations.

Second, there have been no specific fiscal gains as yet from this programme, unless proved otherwise by data.

Third, while digitization has picked up, it has not been at the cost of currency and is hence complementary to such transactions.

Fourth, it does not look like that black money resides in currency and hence the foreign accounts or global property and gold dealings are probably more pertinent here.

Fifth, people have reverted to use of cash and even today is preferred by the common man.

Sixth, we are still not certain if we have become a more ethical society as the idea of corruption is really deep-rooted and cannot be managed by such macro programmes. Lessening human interfaces which GST attempts to do is the way out of this tricky situation.

On the whole, if one has to stick one's neck out and take a position, on balance it can be concluded that the economic gains have been minimal but the losses in terms of inconvenience has been transitory at the macro level. Future trail of income is definitely going to be easy and will lead to a more ethical society. Was it worth the trouble? Probably not, as this resembles a war with no clear results but some collateral damage amid peripheral benefits that have yet to seep through the core.

Updated Date: Nov 07, 2017 13:15 PM

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