Gamble with Currency Reform

Most the recent articles in the literature in the recent times has been on how de-monetization has caused huge cost on economy and how the economy will take several quarters to recover from it. Most of the arguments are in the lines that the economy was in the path of recovery after the slowdown during the UPAII regime and Modi government took unnecessary risk of stalling or reversing some of the good progress initiated. The argument is that this was a huge political risk taken by Modi with an eye to be seen as person bringing change and fighting Black Money and corruption in the hope of enchasing on Modi vs all battle in the UP election.

The most accurate cost of demonetization was presented by CMIE in its report which predicted that direct calculate-able cost of this policy measure is of the order of Rs 1.28LakhCrore which amounts to roughly 1% of GDP. Others have predicted a slowdown in economy by .2 to .5 percentage points with growth falling below the 7% growth mark after India has made steady progress to breach the barrier and hurdled past China to be the fastest growing economy in the world. All these estimates do not calculate the productivity loss due to people standing in bank queues and transaction loss due to lack of liquidity at micro level for individuals to do transactions.

With so much costs to be footed by the country, the policy pundits wonder if Modi had to take such a large risk than he could handle or he grossly underestimated the costs involved due to hubris of decision making. In the evaluation of Mod’s two years of governance most people had opined that Modi could have achieved a lot more in terms of reforms and Modi was mostly rehashing UPA policies. Hence, there was a need for him to rebrand himself and be seen as change maker to his base.

Some folks have argued that due to secrecy of decision making process a large section of diverse opinion could not be consulted and the preparedness of RBI could not be gauged accurately. People also argued that RBI is a policy making body with no tight control over its supply chain of delivery of cash and do not have wherewithal to micromanage the large scale distribution of currency with accuracy to ensure supply to every corner of country.

Banks were also seen giving preferential treatment to priority customers and several bank managers caught indulging in dubious practices, resulting in large queues outside banks. The supply of cash to ATMs were also severely stressed with logistics operation folks having to work round the clock to fill the ATMs and due to run in on banks like situation, most ATMs would be dry within few hours of filling. The requirement for recalibration of ATMs for 2K notes taking 2to3 weeks did not help the situation.

Income tax department has put data that in a country of 1.2Cr only 24 lac people in all India filed returns over 10lac. Yet they point out that 25 lac new cars including 35K luxury cars are bought each year. Hence, it is widely accepted that there is huge amount of under reporting of personal income in India. Successive government have launched voluntary disclosure scheme which has not resulted in huge increase in tax payer base. Despite tracking high value transactions and data mining on existing database, Income tax department had not been successful in widening the tax base.

With 15lak Crore coming back to accounts which can be tracked through PAN, Government would have better mechanisms to track the transactions and do data mining to widen the tax payer base. Government hopes that 3–4lac Crore of deposited money would be non-taxed money and upon review would be able to extract tax on this amount.

It was no secret that in the first two years of Modi government, it was being uncovered that several banks have large NPAs and are under stress and unable to lend, despite reduction in rates by RBI. With the fresh infusion of deposits into banks the ability of banks to lend would improve which should help stimulating the economy .

The objective of demonetization would be served if it can push up the tax payer base by 2 to 3 times from existing from existing 3.65Cr folks filing returns to cross the magic number of 10Cr filing returns, windfall gains to government through tax collection from the current amnesty scheme and significant increase in bank lending to priority sectors to stimulate the economy in the longer run.

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