Cashless economy, black money, political gain, economic pain, too few data points and too many anecdotes have all combined to create enormous confusion about demonetisation. After three weeks, here is my sense of where we stand including the biggest source of continuous black money generation — extortion of all kinds. It is the elephant in the room which nobody is interested in discussing.
1. Losers: Demonetisation is really aimed at those who have large stacks of old notes that they can’t declare. This will trap many professionals holding cash. However, two sets of people would still escape. Current accounts are allowed to deposit up to Rs 12.50 lakh and there are already stories of many businesses acting as cash coolies. Besides, I have heard of reports of a senior IT officer telling a businessman, “The government may threaten with penalties and jail terms but we don’t have the resources to monitor.” A second set of people who could get away are political parties or government officials. While their current stacks of notes will turn useless, they have the ability to extort — “take back these old notes and get us new ones”. It is already happening, according to some reports.
2. Gainers: Two of the biggest gainers are PM Narendra Modi and the government. My own informal survey in Mumbai and Kolkata shows an overwhelming support for Mr Modi’s move among the lower middle-class and poorer people. This could translate into votes for Mr Modi wherever he personally campaigns. The government gains in two ways: Bringing more people into the tax net and from the notes that are not tendered back. Even if the second figure is Rs 1 lakh crore, its a great number to throw in election rallies. Consider: “First we have got Rs 30,000 crore as tax under the disclosure scheme and now have got Rs 1 lakh crore of black money. We will now spend this money on the poor. No government in 70 years has done this.”
3. Tax terrorism: For the past year, the discourse about governance has changed from philosophy (minimum government) to lofty “schemes” (Clean India, Startup India, Stand Up India, Make in India…) to coercion. In tune with this, on November 16, the government inserted Rule 12E of the income tax Act which states "The prescribed authority under sub-section (2) of section 143 shall be an income-tax authority not below the rank of an Income-tax Officer..." Section 143 covers under-reporting of income (or what is known as the scrutiny section). Earlier, cases under this were picked by a computerised system or needed the okay of an IT commissioner. It now gives powers to the lowest rung of IT administration, with enormous scope for misuse.
4. The old, new normal: Demonetisation will put only a temporary pause on generating black money which arises from two main sources: Undeclared earnings and extortion. There will be some dent on the first, with some doctors issuing receipts to patients. But what about the latter, such as the hafta collected by a combination of police, underworld and local netas? What about government officials who refuse to clear files without bribes? What about the widespread practice of buying postings? These people have extortive capabilities and will simply go back to their old ways.
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5. The mirage of a cashless society: Demonetisation is not designed to turn us into a cashless society. If that was the goal, the government would not have issued a higher-denomination note and issued a newly designed Rs 500 note. If a cashless society was the idea, the government would have increased cashless transactions first, and then soaked up the remaining cash hoard. This would perhaps have taken poor people out of the sledgehammer action of November 8. Vodafone and Airtel could have leveraged their recharge network to accept Rs 500 and Rs 1,000 notes and to load mobile phones with money, which could be used to pay for goods and services. Demonetisation cannot suddenly stop the voluntary exchange of cash. Over the next few months, the demand for cash in a cash-driven economy will force the release of more cash. Will we be back to square one?
If the government is really serious… What is not clear is what the government wants to target: Reducing cash or black money. The first involves creating an institutional framework of micro cash transactions bypassing bank accounts. In its wisdom, the Reserve Bank has ordered that mobile phone companies will not be able to use their database for payments banks. This needs to be reconsidered. This framework then needs to be supported by incentives and a strong and swift grievance redress. Exactly the opposite happens now. For example: Online services levy “convenience charges”. As mentioned, black money has two components: Unreported income and extortion. The first is being addressed slowly. It will require a combination of carrots (reduced taxes) and sticks (better enforcement) to speed it up. Extortion generates the worst kind of black money. The antidote of extortion is minimum government, a pre-election slogan long-forgotten and which no one has an interest in — not even the opposition parties.
The writer is the editor of www.moneylife.in
Twitter: @Moneylifers
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
