Demonetisation exercise has been synonymous with shortage of new currency in the form of Rs 500 and Rs 2,000 notes. Banks were hard put to meet the needs of their customers for last two months starting from 09 November 2016. Most were rationing the new currency received and hardly any bank was giving the full authorisation of Rs 24,000 for savings bank account holders and Rs 50,000 for current account holders. There were serpentine queues at bank branches and functional ATMs across the country. Most citizens underwent a lot of inconvenience and for some it even caused a severe dent in their livelihood. Yet, the nation as a whole exceeded the expectations of the government by displaying immense patience and restraint to tide over this difficult period. While the common man was going through the travails of collecting a few new currency notes for his immediate needs, surprisingly within days of the announcement on 08 November, there were reports of raids on some individuals who were flush with stacks of new currency notes amounting to lakhs and crores of rupees. Given the extreme shortage of new notes and strict governmental restrictions in place, this was indeed surprising. It is still a mystery for the common man as to how this was achieved. Whatever it was, it certainly was Indian ‘juggad’ at its best that once again beat the system.
There have been various explanations as to how such huge quantities of new notes, in factory packed condition, found their way into the hands of the select few. Various reasons like use of bogus accounts, exploitation of Jana Dhan accounts, use of proxies and connivance of bank officials were advanced to explain this phenomenon. Surely these large sums of new notes could not be amassed in a matter of few days by accumulating small withdrawals of a few thousand rupees from hundreds of accounts. Such explanations do not even stand to a basic audit. In all fairness it has to be assumed that the very system that was supposed to ensure equitable distribution of new currency notes must have been deliberately compromised by those in authority to satisfy the greed of a few people. Since there was strict monitoring for distribution of new currency, it should not be difficult to trace out the route and sources from where some of these fraudsters managed to get lakhs of new currency notes. The question is has the government zeroed down on such sources and those who facilitated these illegal transactions? If so, why has the information not been made public since this is a matter of grave public concern? After all government received maximum support from the public despite the obvious hardships that they had to undergo.
From the data available in public domain, it does appear that demonetisation has had no major impact on those who were holding black money. The good thing is that most of the stashed cash has found its way to the banks and is now available for circulation instead of lying around in safes, lockers and other unconventional hiding places. The government is likely to collect some extra taxes, a onetime gain, on some of the money deposited. More money will be available with banks for disbursement and interest rates on lending will fall as has already been seen in last few weeks. Whether this actually translates into industrial, infrastructure and housing growth in the near future is yet to be established. The growth in economy is also tied up with the kind of budget that the government will present next month. Hopefully it will compliment the demonetisation drive to give a surge to the growth story. On the flip side lower interest rates will hit returns from savings in banks. But then these are basic rules of economics and as they say there can be no gain without pain.
Increase in digital / banking transactions, a fall out from demonetisation, should certainly be welcomed. This will reduce dependence on hard currency instruments, lower expenses incurred on cash management and ensure greater transparency in business dealings in the long run. However it will be naive to assume that India will become a predominantly digital (or cashless) economy in the near future. India is not in a position presently to emulate developed countries like Belgium, France and Canada, who lead the list of cashless transaction economies for consumer spending with a figure of around 90% of their total spend. In Asia, South Korea leads with a figure of around 70%. Considering India’s huge population that has still to become bank savvy, poor education levels, lack of reliable internet infrastructure including penetration and a mindset that feels comfortable with hard cash in hand, it is obvious that India is not ready to graduate to being a predominantly digital economy in the foreseeable future. Yet the fact that the government has given a major push in that direction is indeed laudable keeping long term goals in mind. Encouragement in this regard can be drawn from poor countries like Swaziland and Kenya in Africa where digital transactions have become the norm for majority of the population despite their obvious lack of development and education.
The question that is still begging answers is whether demonetisation will lead to curbing of black money and eradication of corruption. It has been reported that more than 94% of the total estimated money (in Rs 500 and Rs 1,000 notes) has since been deposited in banks. Does this suggest that a lot of the black money has found its way in banks and could now be construed as white? Of course there will be scrutinises and investigation on some deposits and taxes collected, but it may not be wrong to say that a lot of the estimated black money is no longer black. The innovative Indian ‘juggad’ has once again come to the fore. Will black money be generated again in due course? In all probability the answer is in the affirmative as only a small percentage of people and entities may be motivated to opt for a more honest accounting pattern in the future. Not paying taxes has become an article of faith with many in our country and that seems to be in tact as on date. There is nothing to suggest that it is otherwise. As they say charity begins at home, therefore law makers (elected representatives) and their parties must take lead in making political funding transparent and institute fool proof systems within the government machinery to root out corruption at all levels. In absence of such a commitment, black money is unlikely to reduce significantly. So far, barring some rhetoric from the ruling party, no one has come forward to bell the cat.
One area where corruption is the king is the corporate sector that thrives on bank loans but fails to repay. Since most banks deal with public money, the loss has to be borne by the government but the real loser is the common citizen who deposits his hard earned money with the banks and pays taxes. The country has been rather magnanimous to industrial houses who have duped the system of thousands of crores – at times by design. Banks, at the behest of politicians and others in authority, have continued to fund failures and have sunk millions knowing fully well that no returns could be expected. The government and banking authorities have deliberately not brought such defaulters to book which has resulted in more number of defaulters since playing with public money has become the ‘name of the game’. As they say ‘in India it is invariably the industry that fails, the industrialist never fails’. This statement sums up the whole approach of corporate funding where industrialists siphon off funds for personal gains leaving the industry sick. The collusion between politicians, bureaucrats, bankers and the industrialist has cost the nation dear and today the default debt is estimated at about Rs 6.7 trillion. Demonetisation has nothing to do with this national fraud and no government has shown any will to address this pressing issue. Will the current government fare better; it still remains to be seen.
It is well known that transactions in real estate and precious metals (gold & silver mainly) are preferred havens for parking black money. While this malady can be partially corrected by placing suitable curbs on use of cash for such deals, there is a need to strike at the root cause of generation of black money. The larger problem here is the generation of black money by individuals and businesses who avoid paying taxes that result in an informal cash economy. While mind set is a problem here, conniving corrupt authorities who allow such businesses to thrive is also a major issue. It is no secret that businesses and individuals who comply with all rules and regulations, are the ones that are harassed more by authorities than the ones who operate on the other side of the law. That has been the bane of Indian officialdom for many decades now. The reasons are obvious since the later entities thrive by buying off the authorities that normal law abiding ones do not. While reforms like lower tax rates and simplification of compliance procedures can help to change the mindset over a period of time, the first and foremost need is to have an honest, competent and people friendly administration in place.
Demonetisation per se will neither curb black money nor root out corruption unless a relentless follow up action plan is put in place that takes into consideration prudent tax structures with ease of compliance, education on the need to pay taxes, a proactive judicial system and removal of administrative/ political arbitrariness. Demonetisation is but one step in this direction. Digital payment systems are convenient and cost effective means for carrying out transactions but cannot be seen as an ultimate end to root out corruption. Corruption and black money are intertwined and complement each other. The fact that corruption gives rise to black money (and vice versa) is not disputable. Indian political, judicial and administrative leadership has enjoyed authority plus monopoly minus transparency for too long which, without a doubt, is the root cause of corruption in India. It is time they are cut to size and made accountable. If this is done errant citizens will have no choice but to fall in line.
Saroj Chadha, an engineering professional, is a successful entrepreneur. Having retired from the Indian Army after having served for over 23 years, he has also been a consultant for leading Indian and Multinational electrical companies. He lives in New Delhi.