The Few Upsides to Demonetisation
This article is the fourth section of a larger series that weighs up the reasons given for the demonetisation of 86% of Indian currency, and also seeks to uncover the true compulsions behind the monumental action.
The entire study can be viewed as one article. Link below.
Throughout this article, we’ll be dealing with all kinds of large number in lakhs, crores, million & trillions & everything in between. To help with quick conversion, here’s a ready reckoner for reference.
While not every bold action is a productive one; every action, however messed up, does lead to a few positives. Yes, there a few positive takeaways from DeMo. Let’s break them down one at a time.
Will it cleanse the financial ecosystem of Dirty Cash?
If there’s one undeniable fact, it’s that there’s been way too much dirty cash moving around. The massive real-estate bubble which refuses to burst, and the infestation of gold & jewelry shops across swanky streets are the clearest indicators of all that is wrong with India’s love for dirty cash.
And then, the luxury cars — a most incessant and annoying reminder that a whole bunch of crooks are making hay while the hot sun shines on your tax-paying ass: 35,000 luxury cars at 30+ lakhs each, are being bought every year for last five years. Whereas, according to IT returns, there are just 50–60,000 people earning 25 lakhs or above.
Whatever the government’s true motive(s) for demonetisation might have been, we have to credit them for trying to rein in indiscriminate spending. Since the start of 2016, retailers, primarily from the luxury segment, have had to collect PAN card details for all cash transactions above Rs. 50,000 and for any transaction above Rs. 200,000. Measures such as these — which come at the cost of lower spending, leading to lower tax revenues (import duty, VAT etc.) — have to be appreciated.
But as we all have learnt of late, black money is a flow, not a static object. Old stashes have already been changed for new, and bribes restarted almost immediately.
Until the myriad mechanisms which enable its creation are impeded, this fox-hunt is really not worth the effort — there are too many loopholes in the system which allow an easy escape for the hunted.
But still, it’ll certainly make life difficult for the corrupt…
For the first time the dishonest are losing their money in large numbers. I guess that is a start. And some of that cash is also percolating down as commission for the poor who are converting the old money into new. But the resultant money-laundering is turning a whole host of erstwhile honest people into collaborators — which doesn’t make for a bright future.
So, just who are these filthy-rich corrupt bast*rds from whose pain we, the people of the nation, will extract such copious amounts of schadenfreude?
Three distinct groups spring to mind, although their modus operandi, as dictated by the structure Indian socio-political system, makes their relationship a fairly symbiotic one.
- Politician-Builder-Mafia — Local strongmen who have leveraged their position in society (as land-owners, elected representatives, ex-cricketers, or just crime-lords) to shove their grimy fingers in any and every pie lying around.
- Unscrupulous Bureaucrats — the real enablers of the this entire Black Money racket. Our taxes pay their salaries; their jobs are to protect and uphold the laws and form the backbone of our nation. Yet, they take from both rich and poor alike, facilitating the perpetuation of the evil that is corruption.
- Petty-to-large baniya classes — who, with a little help from the previous bunch — have been edging out honest businesses, hiding their incomes and cheating the citizenry of their due.
The fear is, these villainous characters know how to play the system much too well for this current situation to be anything more than the proverbial puncture.
Some of their money will be lost, and there might still be a few potholes in the road ahead. But while one bunch of scoundrels get a little poorer, another lot — hoarders, traders, and racketeers in new currency — are having a field day. As during any prohibition, these pimps & dalals have made a killing on this one.
But now the size of the informal economy will shrink. More people will pay taxes & formal economy will grow — which good for the GDP.
Since all stocks of Hard Cash will have to flow through the banking system, it is certain at least a part of it will be taxed. How much? That’ll depend on the jugaad powers of the Indian public. Considering that almost all the cash is back in the banking system well before time, we should assume that they’ll manage to get most of it out, in time, as well.
Of course, the closer we move towards the long term goal of a more inclusive formal economy, the better it is for the govt. and its financial instruments.
India’s tax to GDP ratio is 16.6 per cent. Around 25% of that comes from Income Tax, the rest through various indirect taxes. That 25% is paid by 5.5% of Indian earners.
Only 5.5% of earners pay tax! How can it be that low?
Well, mainly because the agricultural sector — which employs almost half the working age population & constitutes 25% of the GDP — is non-taxable! Add link.
So basically 42% of Indian earners, no matter how much their income, don’t even have to pay taxes. Also, those who belong to Scheduled Tribes of most parts of N-E India & Ladakh are fully tax-exempt.
But most importantly, if 10% of Indians own 80% of its wealth, is it really surprising that the remaining 90% are too poor to pay taxes? That 5.5% doesn’t seem that ridiculous now.
This should help bring more people into the banking system?
JAM — Jan Dhan, Aadhar and Mobile, are part of a big move by this present government to bring as many Indians into the banking system as possible. If ground-level infrastructure can be rapidly vamped up along with a regular flow of incentives through these apparatus, we should see a large number of the rural poor make the shift. Nonetheless, this will not significantly increase the deposit base as the poorer half of our country own only 3% of its entire wealth. There is… only so much they can bring to the table.
The question here is… will the unbanked illiterate poor — whose first brush with formal banking has been this near-traumatic exercise of demonetisation — now begin banking with renewed gusto, or will it be a case of once bitten, twice shy?
Still, the flood of cash will mean lower rates & more money to lend…
Quite possibly on orders from the government, big public-sector banks have begun to cut lending rates. This is perhaps the one thing you could have made safe bets on right at the start.
Raghuram Rajan had been shouting himself hoarse for a good many months before he left, that banks were simply refusing to lower loan rates proportionately with RBI rate cuts. The fact is that — or rather, the crux of the matter, is — most public-sector banks are sitting on piles of bad loans. They have been, and if I may be a blunt, shit-scared to give any kind of loans lest their bad debts increase. We shall elaborate on this topic soon.
Okay, but this move shows the government is ready to take bold steps to tackle corruption!
True, there is no doubting the seriousness with which the government is going after hoarders of Black Money. Provided the Income Tax department follows through with equal vigour, this should make, at least a few, tax-evaders think twice the next time around. More and more people will choose to come into the formal economy just to play it safe.
However, knowing the smarter-than-average Indian’s capacity for jugaad, the fear is that the government will now have to deal with an even greater level of scheming and deception when attempting future crackdowns.
Will it improve India’s confidence amongst international community?
A move like this should enhance India’s ranking in various global indices of transparency and also in the ease of doing business survey. On the other hand, the powers-that-be, might not look so enthusiastically towards a government that claims to be pro-business, but has no qualms about running rough-shod over the Laissez-faire system that defines capitalist society.
What of the huge tax-gains? These will mean increased spending on Infrastructure, Health & Education.
Well, the tax-gains aren’t going to be anywhere as large as previously expected. The RBI has been keeping mum about the figures for over a month now. Such being the times we live in, let’s not attempt an assumption. Let’s just go with an arbitrary ball-park figure of 2 Lakh Crore (Trillion).
However, any moolah squeezed out through taxes, penalties or wrung out of the RBI (I hear, the correct phrase is ‘extinguished liabilities’) will have to be offset against the runaway costs of re-printing, transporting and distributing cash. And then you’d have to factor in the various costs incurred by banks, enterprises (SMEs to MNCs) & private individuals in the form of lower revenues.
And then, add all the tax sops and interest waivers which the PM just announced during his NYE speech. More tax reductions — both individual and corporate — are likely to follow in the budget. All these added together, and the govt. could be looking at a 1 Lakh Crore (Trillion) Rupee bill.
As for spending on health and education: who isn’t for it! It’s just that going by this govt.’s track record, we must be excused for any lack of faith.
What seems a lot likelier, is that the govt. will use a significant portion of their spoils to re-upholster the capital ratios of public-sector banks, which currently, lie in tatters.