An assessment of the impact of demonetisation on growth must wait till we have concrete numbers, says Arvind Panagariya, Vice-Chairman, NITI Aayog.

“I have been maintaining that we have to see the actual numbers. Tax numbers are one piece of information. We also have the recent estimates from the Central Statistical Organisation but they are based on pre-demonetisation period data,” he said.

With less than three weeks to go for the Union Budget and all eyes on the Finance Ministry, BusinessLine caught up with Panagariya to get his views on demonetisation, economy, and disinvestment. Excerpts :

What is your overall assessment of the economic situation now (post demonetisation)? Any indication of how much of removed notes has returned to the banking system? How much black money is actually in?

The economy is now getting back to normal. The cash situation today is far better than what it was in the initial weeks after demonetisation.

As far as I know, no official numbers have been released on the proportion of the discontinued notes that have come back into the banking system. So I am going by media reports. I have read two separate numbers: one said 97 per cent was back and the other said 93 per cent. We have to wait for the actual numbers to come out.

As regards the magnitude of black money, we will be able to determine it once we know how much of the money has been deposited without explanation of the source and how much has not returned to the banking system. As you know, the former funds would be subject to 50 per cent tax with another 25 per cent deposit into the Prime Minister’s Garib Kalyan Yojana interest free for four years.

Do you see demonetisation bringing about structural change to the Indian economy? Do you see the gains outweighing the pains, especially for those in the informal segments?

It will surely bring structural changes. It will lead to greater formalisation of the economy.

In the longer term, this formalisation is an essential part of transformation into a modern economy. Pain was concentrated during the first two months. Benefits will accrue for a lot longer through improved efficiency and productivity. I also expect that the disrupted supply chains would recreate themselves in the coming days.

After more than two months of demonetisation, has its objectives been achieved?

Yes. The exercise has led to much of the black money returning to the banking system. The government will collect tax and penalty on this money. Some of the black money has not returned and that will be expunged. Fake currency in circulation prior to November 8, 2016, has also been destroyed.

Remember that for some time, there had been complaints that the Prime Minister had not done enough to curb black money as was promised in his party manifesto. Now demonetisation has cleared those doubts in no uncertain terms.

Do you see the government getting additional revenues post demonetisation — either as taxes or as dividend from the RBI? Any policy inputs from NITI Aayog to the Finance Ministry for the upcoming Budget?

Yes of course, there will be some step up in revenues. Tax and penalty collected on the money that has been deposited into bank accounts will contribute to revenues. There is also the possibility of the money that has not been returned being turned into revenues once the RBI liability is wiped out, though this is a matter of some debate at this point. As regards Budget inputs, we are having discussions and some suggestions have been made to the Finance Ministry. But I prefer not to comment on the details.

Let us rephrase: In the upcoming Budget, what should be the focus — prioritising infrastructure spend or enhancing social sector spend?

I don’t see it as an either-or issue. We have to move radially and increase both capital (i.e., infrastructure) and social expenditures. Within the social expenditure, I would recommend tilting in favour of health since our public expenditures on health remain very low.

NITI Aayog has been promoting digital transactions. Is there a case to provide direct tax breaks to individuals to encourage adoption?

It is not easy to do this for individuals. It has been done for businesses through recent announcement on relief in presumptive taxation. For individuals, incentivisation will happen through reduction in our elimination of merchant discount rate (MDR).

Is there a case for making financial markets pay more taxes?

With so much fragility in the financial markets, I won’t recommend it. The Finance Minister has already clarified on this. There is uncertainty originating in the US that has already been putting much pressure on emerging-market currencies.

Till now there has been no strategic sale of PSUs. Are you still optimistic?

We have already made recommendations. I am hopeful that some disinvestment through strategic sale will happen this fiscal.

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