Exactly a year ago, when the government banned the high-value currency notes declaring that the move will curb the size of black economy in the country, many people hoped that ‘’short term pain would make way for long term gain” as promised. In the days following 8 November, however, as several sectors of the economy and large sections of the population experienced hardships due to the note ban decision, many questions were raised. Reasoning and evidence by experts and commentators on either side of the debate have put forth a gamut of arguments; it appears that this debate is far from getting over.
While the critics point out inefficiencies and lambast the experiment on account of poor design and implementation, the supporters are trying to claim success with the use of different kinds of figures. The maze of counterpoints and data put on record from both sides, makes the question on effectiveness of the policy measure, more complex than what seems on the face of it. As the country marks the completion of one year of demonetisation, it is a good occasion to examine this.
Let’s delve into the arguments of the government first. Citing tax compliance as a crucial measure to judge demonetisation’s success, political anchors justifying the decision are extolling the increase in level of voluntary tax compliance this year. The drive helped the government widen its tax base and effect improvements in the number of income returns filed. As a consequence of the move, it is shared that, direct tax revenues have grown by 13.5 percent, which is very close to the targeted 15.6 percent mentioned in the Budget speech earlier this year. But could it be a post hoc justification? Globally, digitised and cashless payments are seen to be important steps in favour of financial inclusion and access to cheap credit, both fundamental in the battle against poverty.
Post demonetisation, the sense of urgency to find alternatives to cash successfully pressed ahead digitisation. Administrative clearances that would have taken much longer were completed in no time and executed immediately. But the experiment that was conceived as a surgical strike against tax evaders and fake currency turned into an assault on the unorganised sector that was completely reliant on cash. Could all this have been done at a lesser cost with far fewer disruptions is a question that needs an answer.
The arguments of the other side point that the government was out of its depth on the subject. The move placed a lot of strain on all aspects of the economy. The result of the economy suddenly becoming cash-starved caused severe disruptions- a fall in consumption, reduction in demand, loss of job for many daily wagers due to lack of cash with firms for making payments. The informal sectors came to a halt and the rural economy collapsed. The revelation in RBI’s annual report that almost 99 percent of the banned currency was legally returned to the banking system established that un-accounted-for money was successfully converted into other forms quickly. The thinking behind note ban was that people with black money would be scared to deposit it in bank accounts; this meant a windfall corresponding to un-returned currency for RBI, which in turn would have to pay the government an equivalent dividend.
The government says, though, that a significant portion of the cash entering the system could be black money. The exercise did lead to an audit trail of suspicious accounts, but these amounts are insignificant as compared to the reported size of black economy in the country. Scrutinising these accounts meticulously, and ensuring that the guilty are penalised is a mammoth task. Capacities of the income tax authorities (in terms of staff strength), administrative and judicial limitations in addition to the cumbersome and time consuming procedures do pose a huge challenge in this process. To fend off the claims of proponents of demonetisation, it is also being argued that an assessment of an anti-black money exercise is complete only if the state of corruption comes down.
If the government is serious in its intention to fight tax evasion, tougher curbs on commercial tax evasion involving massive players need to be prioritised. The war against black money calls for serious reforms to the corporate secrecy regime. For example, lowering the threshold for subsidiaries of MNCs located in India to report their data on a country-by-country basis to Indian tax authorities, and enacting the Beneficial Ownership of Companies Bill can be of considerable influence in this direction.