Demonetisation revisited

| Updated on January 09, 2018 Published on August 31, 2017

Assessing the impact of the note ban should extend beyond calculating the amount of currency that returned to the system

The chief highlight of the RBI Annual Report, apart from its overview of the economy, is its much-awaited disclosure on the amount of demonetised currency that returned to the system as on June 30. It's now official — 99 per cent of the extinguished currency or ₹15.29 lakh crore out of ₹15.44 lakh crore has returned to the banking system. The question is: What does this mean? It would be too easy to conclude, as die-hard critics of demonetisation have done, that the exercise was an unqualified failure. They have argued that, in keeping with a ballpark assessment of 20 per cent of the economy being ‘black’, about ₹3 lakh crore should not have returned to the banks. Annulling transactions amounting to this sum would have singed the fingers of black money operatives and forced them to mend their ways, goes this narrative. Admittedly, this was part of the official discourse as well, with the tax establishment unofficially expecting ₹2 lakh crore to be extinguished. However, soon after November 8, it became evident that money-laundering, essentially through Jan Dhan accounts, was under way. By January, it was generally assumed that most of the extinguished currency would find its way back; the RBI data affirm these assessments. However, the criticisms do not take into account the salutary impact of demonetisation on tax compliance and the shift to cashless transactions. The finance minister is right in saying that the influx of these deposits has provided the tax authorities with a database to investigate future tax shenanigans.

Despite reports of hectic money-laundering post-November 8, shady operators have become circumspect. The Economic Survey (Volume II) 2016-17 points out that “the growth of taxpayers post-demonetisation was significantly greater than in the previous year. The addition amounted to about 5.4 lakh taxpayers or 1 per cent of all individual taxpayers in just a few months. The addition to the reported taxable income (of these new payers) was about ₹10,600 crore”. In April-July this year, direct tax collections were up 19 per cent, with the number of returns filed by individual taxpayers as on August 5 up 25 per cent over the corresponding period last year (2.79 crore, against 2.22 crore, an addition of 57 lakh). In another indication of a structural shift, the RBI points out “that currency demand appears to have attained a new normal (currently around 87 per cent of the pre-demonetisation peak)”. With GST, tax compliance can be expected to rise sharply, lifting the tax-to-GDP ratio above current levels of 16 per cent (Centre and States), creating room for undertaking quality expenditure.

However, the Centre should take care to ensure that the sudden rise in searches and seizures since demonetisation does not turn into a witch-hunt. A draconian tax administration would go against the grain of reform. A moot question is whether demonetisation, despite its positive effects, could have been implemented differently to avoid the economic pain that ensued.

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Published on August 31, 2017
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