Debunking Demonetisation Myths
First published on 13th December, 2016 as my Facebook Note/ Post
First published on 13th December, 2016 as my Facebook Note/ Post
The 9/11 “Demonetisation” is a Policy Masterstroke. However, certain sections of people, especially self-styled intellectuals, analysts, economists and academicians are disseminating disinformation about the Mega-Policy even before the 59-day roll-out has been taken to its logical conclusion. These myths are enumerated, examined and dispelled (rather repelled) below.
Most of the critics try and analyse the success or failure of this Scheme against its stated and unstated objectives but give no credit to it even where there is unanimity over the positive impact in a particular segment, arguing that it is unintended. They are at pains to narrate the “immense pain” caused to the poor people (they don’t use the word Aam Admi, for obvious reasons) and the immeasurable harm to the informal economy. They capture the pictures of long queues at the ATMs (which have now all but vanished) and speak like shrieking Cassandras, prophesising gloom and doom.
Just before I embark upon my small and purposive journey to demolish the myths that these elements are trying to profess and propagate (I am sure they’d love to perpetuate these myths), just a small statistic. I promise there would not be too many facts and figures thrown about in this piece. The value of total currency in circulation as on 18 November, 2016 is stated to be Rs. 14.26 lakh crore, whereas the figure as on 31 March, 2016 was Rs. 16.63 lakh crore. Of the latter figure, the demonetised Rs. 500 and Rs. 1000 notes constituted about Rs 14.18 lakh crore, accounting for about 86% of total value of currency in circulation.As per the RBI Press Conference held today (13th December), the banks have taken back Rs 12.44 lakh crore of high-value currency of the Rs 15.44 lakh crore in 500- and 1,000- rupee notes that were estimated to be in circulation on 9/11 (Thomson Reuters), a figure of about 80%. Analysts estimate that the total deposits are likely to reach about 13 to 13.5 lakh crore rupees by 30th December.
It is this brief backdrop that we proceed towards the stated objective of this article, Myth-wise:-
If all the demonetised money in value terms returns to the banks, it implies that there was no black money:
This is the first myth. I don’t know how this deduction is being made. I would rather assert that higher the percentage of the money coming back to the banking system by 30th December, 2016, greater is the index of success. If the money deposited is unaccounted for (i.e. not declared to income tax earlier), 50% of this would come to the Government Revenue as Income Tax, as pure revenue. Another 25% will remain with the Government as a 4-year interest-free loan. Of course, the balance 25% shall be the unfettered “white” wealth of the depositor (rather the account holder).
How much of the total amount deposited into the bank accounts is actually less than Rs 2.50 lakh per account (rather per PAN), remains to be seen. If we take can estimated 2 crore Jan Dhan accounts, the demonetised currency deposited therein does not exceed 10% of the total deposits. This also belies the corollary of this myth that Jan Dhan accounts are being used to launder black money since the per capita deposit is very meagre.
The exact figures can be known only after income tax declarations are filed but immediately after 30 December, 2016, one would be able to come out with an educated guess regarding the incremental income tax accrued to the Government, if the total figure of deposits is disclosed by the Government split as between the Jan Dhan accounts and the regular ones.
The very payment of income tax would be irrefutable evidence regarding the existence of black money in the economy.
The Central Government is reneging on its sacred commitment to honour its currency and sacred commitment:
This is also being portrayed as a great betrayal of the sovereign state qua its citizens. Some erudite scholars and statesmen have even described this as a daylight robbery of the poor man, which has deprived him of his precious savings. Nothing could be farther from truth. The Central Government has not declared or mandated that the old, demonetised notes have become worthless for all intents and purposes. They have merely ceased to be a legal tender, save for limited purposes to tide over the uncertainty of the intervening period (basically essential services). Simultaneously, the old currency has been given a 59-day liberal period to find its way in to the banking system, through bank deposits made by the bearer of the currency. Of course, the banks have been cautioned to exercise due diligence to ensure that the money being deposited into a bank account is by the account-holder himself, or under his explicit written instructions. The currency is being credited into the bank account at full face-value and no arbitrary discount is being applied to attenuate the new credit balance. This important fact is very conveniently glossed over.
That having been said, it cannot be denied that any income being earned, whether by means legal or otherwise, is subject to the Income Tax laws of the country. Through the Finance Bill №2 of 2016, the Government has essentially provided a simple window to the holders of demonetised currency to declare their accumulated, undeclared income and get benefit of the simple scheme proposed, which inter alia provides immunity against prosecution. If a person, however, feels otherwise, he is welcome to file his Income Tax return for Financial Year 2016–17 (that is, in Income Tax Act parlance, Assessment Year 2017–18) accordingly and fight it out before the statutory, quasi-judicial authorities wherein he might get some relief in the tax rate. However, he would equally be exposing himself to higher payouts on account of interest and penalties, apart from the basic Income Tax and also expose him to vigorous prosecution not only under the Income Tax Act but also under other Central Laws.
In any case, one fails to see any element of the Central Government failing to discharge its statutory or moral obligation, as the myth-weavers would have us believe. There is definitely no case made that the poor have been illegally deprived of their hard-earned savings, since not only they had the limited window to exchange a limited amount of the old currency for the new or the valid one, they still have ample opportunity to deposit the demonetised notes into their bank accounts.
It is no Demonetisation: It is merely an Exchange Scheme:
This is another myth that is being drummed up. Let’s face it, this is not about nomenclature and semantics. The old Rs 500/- and Rs 1000/- notes are no longer legal tender. However, the Government is allowing the citizens ample time and unfettered opportunity to deposit the old currency into bank accounts, subject, however, to the fiscal and / or penal consequences of the Income Tax Act, as proposed to be amended by Finance Bill №2 of 2016. In a vanilla exchange scheme, there would have been no questions asked regarding the source of funds and the old currency could have been allowed to be exchanged for the new one at the bank counters, without any upper monetary limit. Here, the opportunity to exchange of currency was very slim indeed. And, the bank deposits are proposed to be accompanied by a simple and foreseeable Income Tax implication for those who want to take the benefit of the scheme floated under the Finance Bill No 2 of 2016. It is this definitely not merely a currency-exchange scheme; it is actually demonetisation PLUS.
Rs 2000/- new currency notes will encourage generation, storage and transportation of black money and encourage corruption:
The logic is actually quite insidious; why go in for notes of Rs 2000/- denomination, if you wanted to demonetise lower denominations? My take is that the Rs 2000/- notes served as a kind of decoy. As the news of printing of these notes, which actually commenced a few months before 9/11, trickled out, no one could foresee or imagine, even their wildest dreams that Rs 1000/- and Rs 500/- would be demonetised. It seemed contrary to logic as the Government and the RBI appeared to be busy printing Rs 2000/- notes. However, this served as a decoy and secrecy and the element of surprise so crucial for this operation was effectively maintained.
As regards the other element of the myth, I take the liberty of quoting from my 14th November, 2016 piece on Demonetisation captioned “What after 30th December, 2016?”:
Cash Withdrawal post-30/12:
“The instant decision of the Government would become essentially a currency exchange scheme if some type of restrictions on withdrawal of cash is not imposed post -30/12. Irrespective of whether your bank balance comprises the post-8/11 cash deposits of Rs 1000/- and Rs 500/- or the previous “white” money, there is bound to emerge some type of a limit on cash withdrawal. The logic would be simple: why should you withdraw huge amounts of cash when all the payments, including to labour etc., can be more conveniently made through regular banking channels. My hunch is that this amount would be about Rs 50 lac on annual basis per person, for pegged to a small percentage of the income declared for tax purposes. Gone would be the days when you could withdraw huge chunks of cash, treat it as cash-in-hand and re-deposit it into your account after months and years.
A natural corollary of this would be making holding of cash above the threshold limit an offence, leading to confiscation of the extra cash and prosecution. This would not be in the nature of Income Tax proceedings or prosecution but rather like possession more than the permissible bottles of liquor.
Business through regular banking channels would become the default settings and the Government would ensure that you do not have access to cash, accounted or unaccounted, to make illegitimate payments or buy assets like gold or dollar in currency form as illegal gratification.”
Therefore, my take is that once there is a limit on indiscriminate and limitless cash withdrawal, the Rs 2000/- notes will predominantly serve legitimate purposes. This inference is further fortified by the fact that RBI has disclosed on 13th December (Thomson Reuters) that it has printed only 1.7 billion new 500- and 2,000- rupee notes to replace the 24 billion individual notes that were withdrawn.
Demonetisation has destroyed value across the economy:
Yes, it has destroyed value qua some stakeholders, especially those who were hoarding their undeclared income in form of high-denomination currency notes. They would either be compelled to deposit these in their bank accounts and thus lose a very significant proportion of their money in income tax. Others would lose value and continued to incur risk if they had chosen to get hold of undeclared and illegitimate assets like gold, dollars (and other foreign currency) and new currency notes, at a huge premium in the grey market. It will also destroy, or at least diminish, value in the hands of those who hold undeclared assets like real estate or have advanced loans in form of undeclared cash previously. Defaults in interest and principal amounts are bound to increase sharply in such cases and the lenders will have no viable remedy in their hands.
The poor man may have faced a bit of inconvenience but there’s no destruction in value of his cash, whether in bank or held in form of currency notes, the presumption being that no poor person would be holding more than Rs 2.50 lakh in high-denomination currency notes.
The Government, of course, would be a net gainer by virtue of incremental Income Tax garnered by it as well as through the 4-year interest free loan. Thus the value erosion has rightly taken place in the hands of those who have evaded taxes, whereas the common citizen would be a gainer in the process because the increased Government receipts shall be poured into programmes for the socio-economic benefit of the weaker sections of the society.
Conclusion:
Demonetisation is a momentous decision. As I stated elsewhere on the Social Media, the previous schemes failed not because they were economically ill-conceived but but because there was very meagre political support. The instant demonetisation shall succeed, not because it is economically a most ideal or a painless scheme but because the political support is one hundred percent.
Demonetisation shall mark a watershed in the emergence of a new, rejuvenated Indian economic substantially purged of black money. The myths propagated will vanish in the coming few months and the temporary inconvenience notwithstanding, history will record demonetisation as the single, most significant and monumental reform in the journey of India as a free nation. At least, I am willing to bet my only and last the Rs 1000/- demonetised note, which I hold as a Collector’s Item, on it.