A month without cash

| Updated on January 16, 2018 Published on December 08, 2016

Demonetisation, despite its effects, will have worked if it succeeds in expanding the tax net

A month after the Government withdrew 86 per cent of the currency notes in circulation amounting to over ₹14 lakh crore, it is time to assess whether the three stated objectives of the demonetisation exercise — sucking out black money, wiping out counterfeit currency and moving to a cashless economy — are likely to be met. What is undeniable is the hardship ordinary people have suffered in the wake of the sudden disappearance of cash. Demand compression in agriculture, services (such as retail, hospitality and transportation) and small industries has impacted millions. Wage payments to informal sector workers have suffered; even those with bank accounts have not been able to draw sufficient money. Given that the informal sector accounts for 45 per cent of the GDP and 90 per cent of all employment, it would come as a pleasant surprise if the contraction in growth this fiscal is restricted to half a percentage point (from 7.6 per cent to 7.1 per cent), as estimated by the Monetary Policy Committee. The Centre must address this state of distress on a war-footing.

However, the moot point is whether there is light at the end of the tunnel. While counterfeit ₹500 and ₹1,000 notes to fund terror have been flushed out, the new notes must have enhanced security features to prevent a recurrence of the problem on a similar scale. The assault on black money should not stop at a single surgical strike on cash. The key issue is to address the processes by which black money is generated, rather than focus on the ways in which it is parked. The black economy is basically a fallout of crime, bribery, tax evasion and elections. Curbing criminal activity is a law and order issue, while bribery and tax evasion (misinvoicing of goods and concealment of income) can be curtailed by introducing transparent governance practices, applying digital technologies and simpler laws. GST can play a positive role in this respect. Electoral reform, though, calls for exceptional political will and consensus, which has so far not been visible.

If demonetisation manages to push the economy towards cashlessness, it will have achieved a lot. The current shortage of cash may force service providers to account for their transactions. This will bring them once and for all under the direct and indirect tax net, ushering in a culture of compliance as against one of evasion. Implementing GST will become easier. It will take time for most of India to go cashless, given that less than half the 25.8 crore Jan Dhan accounts are linked to Aadhaar and a significant section still does not have a bank account. But fintech innovations can make digital transactions accessible to those without smartphones, bank accounts or an internet connection. If India manages to expand its low tax base significantly as a result of demonetisation and the shift to virtual money, it would mean the bold move on November 8 has paid off.

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Published on December 08, 2016
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