Why did govt go after cash component of black money? It only accounts for 5% of total tax evaded income

When he made that dramatic announcement on 8 November 2016 extinguishing all existing Rs 500 and Rs 1000 notes, Prime Minister Narendra Modi stated three major objectives of this sudden and draconian announcement. The first was to force the 'black money' back into the formal system. The second was to filter our counterfeit notes, and the last was to cut off terrorist funding.

In November 2016, the total currency in circulation was Rs 17.97 lakh crores, 86 percent of which was in Rs 500 and Rs 1,000 notes.

It was hailed by the government’s drum beaters as a stroke of Modi’s genius that will result in a bonanza of Rs 3-4 lakh crores to the Reserve Bank of India (RBI). The government’s propaganda machine even showed clips of old notes being dumped in rivers and wells.

The picture being painted was of the corrupt and the tax evaders being scared out of their wits and just dumping the cash. But the people of India are made of sterner stuff and today 99.83 percent of the extinguished cash has come back to the RBI and it is still counting.

 Why did govt go after cash component of black money? It only accounts for 5% of total tax evaded income

File image of Narendra Modi

In 2016, there was indeed a problem with counterfeits. In 2014-15 they rose by 22 percent to almost 6 lakh pieces. In 2015-16, of the counterfeits detected, 415 were in 500’s, 35 percent in 100’s and the rest in 1000’s. These are notes in flow, and assume that an equal number are sitting in dormant stock.

Consider this against the fact that in April last year there were 1646 crores of 500’s and 1642 crores of 100’s in circulation. They were still small change, not distorting the system by much. A better way could have been found to filter them out by an orderly exchange of high value notes.

And as for terrorism in J&K and Naxalism in central and eastern India, there is no hard evidence of such activities abating. Now, the government has let us know that the 'cancer' has spread to urban areas and the 'Urban Maoists' were planning to buy 400,000 under-barrel grenade launchers. Clearly, imaginations are running riot or the problems have become bigger. It is more likely the former.

By taking out that much money from the market, the government inflicted a huge pain on an economy where 98 percent of all transactions accounting for 68 percent of the value are in cash. At any given time, about 150 million workers in the informal sector are daily wage earners and are still paid in cash.

With the abrupt sucking out of 86 percent of the cash, it was this cohort who bore the brunt of the assault. The vacuuming of the cash led to huge job losses and tens of millions just went back to their villages. The economic costs have been estimated to be at least Rs 225,000 crores or 1.5% of Gross Domestic Product (GDP) that year.

Let us look at some official data to understand the huge cost inflicted. In the past few days, the government spokesman and their phalanx of increasingly desperate drum beaters in the media have been exulting over the Q2 GDP growth having touched 8.2 percent. The Q2 quarter is always the high GDP growth quarter. This is mostly because government and private expenditures are rushed through to beat the year ending closure of the books.

The Q2 growth in 2015 was 8.4 percent. The Q2 growth in 2016 was 8.1 percent. As a matter of fact Q1 2016 clocked 9.1 percent, suggesting that we were heading north that year. Following the self-inflicted injury of demonetisation, Q2 growth in 2017 plummeted to 5.6 percent. Now Q2 2018 growth has clawed back to 8.2 percent. It just means we have resumed on the old track and that lost a year and at least Rs 225,000 crores on a hare-brained diversion. Some economists, Manmohan Singh being notable among them, actually estimate the net loss in the year that followed to be around 2 percent of GDP, taking it closer to Rs 300,000 crores.

The physical and mental anguish to the 150 million daily wage families can never be measured. How can you measure the pain of hungry children and agonised parents?

But there are other costs that can be quantified. It is estimated that the cost of printing replacement notes, re-configuring the automated teller machine (ATMs) and the logistics of rushing through the printing of new notes and transporting them to the banks was around Rs 40,000 crores.

In recent days, there have been reports emanating from China that a good quantity of the Rs 2,000 notes were printed in Chinese security presses on a job work basis. Since counterfeiting was supposedly a major concern of the suspicious minds in the PMO, the cost of this is yet to be estimated or felt.

The question that should matter most now is whether the incidence of 'black money' in our economy has come down. Sure income tax collections have spiked a bit. But that is mostly because of the back pays and new pays due to the generosity of the Seventh Pay Commission that gave 2.35 crores of government employees a 24 percent across the board hike. All government employees are now in the tax paying levels.

The number of I-T returns had been growing at a good pace since 2010. Following demonetisation in November 2016, the returns filed for 2017-18 increased by 99.49 lakhs to 6.84 crores tax payers. This was 16.3 percent more than the addition of 85.52 lakhs returns filed in 2016-17.

This is quite logical considering that the economy has been growing by about 7 percent for many years and that according to Oxfam’s estimates, 73 percent of the growth has been accumulating with the top 1 percent. It is also known that this 1 percent also accounts for 58 percent of India’s wealth. So why should it come as a surprise that the number of taxpayers too has been increasing?

Finally, the big question that still remains is, why did the government go after the cash component of 'black money' when it only accounts for about 5 percent of the total tax evaded income. The rest is held in cash abroad, land and property, jewellery and gold. Unearthing this will take some doing and in doing so the officialdom and its political masters will only generate more 'black money'.

And consider this, as much as 55 percent of the Foreign Direct Investment (FDI) investment coming in (about $44 billon last year) is actually Indian-owned money round tripping its way back from the economy it fled from. Is the government now going to look at this gift horse in the mouth by asking these ECB’s to declare their origins?

(The writer is Chairman, Centre for Policy Alternatives)

 

 

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Updated Date: Sep 02, 2018 08:34:16 IST