As the post demonetisation scenario plays out, within the first four days, total cash flow to the banks had touched Rs 3 lakh crore. So, if the main rationale behind this drastic step is that large amount of currency in circulation must find its way into our formal banking system by way of deposits, the objective apparently is being fulfilled. But if the rationale is to wage a war on black money, focus needs to shift to more meaningful measures.
It cannot be dismissed that a substantial chunk of this money may be white money. For it to yield results and contribute to increase in government revenue would require a great deal of scrutiny in order to arrive at a proper understanding of what part of the currency inflow in banks is ill-gotten money and how much is legally earned money.
Making the already difficult job more so is the fact that some disclosures would come from huge numbers of poor who would have held cash as savings and for meeting contingencies. Hence, unless the Income Tax department, which is supposed to have already dived down and started taking up cases for scrutiny is all geared up for handling this enormous task, this only adds to the ordeal of the apparatus reeling under immense stress. Only a thorough scrutiny examining the source of high value deposits would help people reach an informed opinion and not make wild guesses about the effectiveness of this measure in addressing the problem.
The probes in recent years conducted by the Income Tax department have reportedly indicated that only 5 to 6 percent of total black money detected was kept as cash. If this is the case, the current demonetisation drive would be able to touch only a fraction of the present stock of black money in India. The move would attack only a part of the stock of black money, which is hoarded cash and not the generation of black money in future. Hence the government must now focus on taking some major steps towards curbing generation of black money.
In its efforts to curtail the parallel economy in the country, the government should work on plugging the loopholes in tax administration, and invest in strengthening the mechanisms that will help restrict the outflow of black money to secrecy jurisdictions or tax havens. For instance, the clamp down on black money would be stronger if – there is significantly better sharing of tax related information between countries, more comprehensive country-by-country reporting by multinational corporations, and legislation in favour of ‘public’ registries of Beneficial Ownership of companies as proposed in the Companies Act 2016.
Almost all political parties are said to have got sizable amounts of cash donations that are not declared. A paper looking at Election Finance in India by Devesh Kapur and M. Vaishnav demonstrates the nexus between the real estate sector and election funding. It provides circumstantial evidence that black money lands up in campaign spending. The present move by the government would be more effective in making it difficult for the political parties to use cash for influencing election results if it initiates substantive reforms in cash heavy sectors like real estate. In this context, however, one would wonder why the political parties are not coming forward to accept the widely recommended electoral reform of a complete ban on cash based donations to parties. Should the government mull over bringing in this as the next reform?
India’s cash to GDP ratio is 12.2 percent, which is higher than Russia, Brazil, Mexico; but we are also a largely cash driven economy. A huge part of the country’s economy runs on cash as 90 percent of our workforce is unorganised or employed on casual daily basis. The squeeze effecting money in circulation would badly hit these petty businessmen, traders, small workers and the poor. Further, with just 27 percent of villages having a bank within a five km radius, the number of those who can access the banking system is still quite low. Low bank account penetration, coupled with low financial literacy and high cash dependence in the country have raised a number of concerns with the recent measure of demonetisation.
Due to the sudden drop in money supply, commodity and general cash market transactions could face an immediate impact; this could even slow down economic growth in the short run. The government and the RBI, therefore, would need to ensure that the money sucked out of the economy is replaced very fast so that the pace of buying and selling of goods and services is restored. Else it might have an adverse cascading effect on economic activities and employment in near future. Moreover, taking into account the plight of the elderly people, women and persons with disabilities queuing up for hours outside banks and ATMs to get valid currency banks should make special arrangements so as to give priority to elderly, women and disabled to reduce their hassles.