Demonetisation : A Review
1.1 Five hundred and one thousand rupee notes of total value for Rs.15.44 lakh crore accounting for 86 percent of the entire currency in circulation ceased to be legal tender on 8th Novermer,2016. Three main objectives of this step were: to contain the large circulation of fake currency which adversely affected the economy, prevent black money being stored in currency notes and counter subversive activities such as drug trafficking and terrorism being carried on using fake currencies.
1.2 After some time, three sub-objectives were added viz. aid the creation of a less cash economy, formalise the economy through digitization and expand the tax base.
2 Citizens showed praise worthy forbearance to difficulties encountered by different segments of the economy and people in general for months considering the objectives of demonetisation. The powerful publicity stating that those who oppose demonetisation are supporters of black money hoarders made the critics defensive to some extent.
3 There were expectations that demonetised currency of value from Rs. 3 lakh crore to Rs. 5 lakh crore may not be deposited in banks and thus will get cancelled automatically inflicting a severe blow on the black money hoarders and Reserve Bank’s liability to the extent of this large sum will get extinguished and the amount will be received by the Government as income.
4.1 Contrary to such expectations, out of the notes for a total value of Rs.15.44 lakh crore, banned notes for Rs.15.28 lakh crore – 99 percent- were deposited in banks. Against the expectation that notes upto a value Rs.5 lakh crore will get cancelled automatically, notes for a sum of Rs.16,000 crore only will get extinguished and become the income of the Reserve Bank.
4.2 Reserve Bank incurred expenses of Rs.7,965 crore for printing new currecy notes. In the previous year this expenditure was for Rs.3,421 crore. It is estimated that the cost of printing a new 500 rupee note is Rs.2.87 and that for a 1000 rupee note is Rs.3.54.cash
4.3 The profit of Reserve Bank for 2016-17 decreased by Rs.35,217 crore from Rs.65,880 crore to Rs. 30,663 crore. Incidentally, the income of the Central Government also declined to this extent.
4.4 Details of the additional expenditure incurred by the banks on account of demonetisation are not available.
4.5 During 2016-17 Reserve Bank detected fake currency notes of 500 rupees and 1,000 rupees denomination for a sum of Rs.41.5 crore ( Total fake currency notes were for Rs.43 crore); during the previous year it amounted to Rs.41.8 crore. It is a matter of concern that during a short time after demonetisation 199 pieces of fake notes of new 500 rupees 633 pieces of 2000 rupees were detected in Reserve Bank. There have been media reports of detection outside of fake notes of the new currency. Black money also continues to be seized. In respect of fake notes and black money our country has to move beyond demonetisation.
4.6 There was a reduction in total currency in circulation by 15percent as per Reserve Bank report.
4.7 Direct Tax collected during 2016-17 increased by 14.5% and reached Rs.8.5 lakh crore. This is the figure for the entire year. During the three years from 2013-14 the increase was 14.24%,8.96% and 6.63% respectively. The number of Income Tax returns filed up to August,2017 increased by 24.5% to reach 2.82 crore. The growth during the previous ear was 9.9%. The proportion of Direct Taxes in Gross Domestic Product during 2016-17 was 5.60%. During the three years from 2013-14 the proportion was 5.62%,5.55% and 5.47 % respectively. These statistics do not indicate that there was a big surge in Direct Tax collection on account of demonetisation. But the increase in Income Tax returns submitted is encouraging.
4.8 Those who deposited demonetised notes in banks would have already identified the source. During 2016-17 banks have reported suspicious transactions in 3,61,241 accounts. Similar transactions reported during the previous year was in 61,361 accounts only. Verifying suspicious accounts and detecting black money is a tedious challenge before the tax department.
5 The number of use of debit and credit cards which was 20.5 crore in November,2016 rose to 31.1 crore in December but declined to 19.6 crore (amount Rs.38,600 crore) in May,2017. Mobile banking transactions which were 7.23 crore in November,2016 decreased to 5.76 crore (amount Rs.1,38,000 crore) in May,2017. The achievement made in digitization has returned to the old level and it needs to be revived.
6 The deposits of the banking system which stood at Rs,100.97 lakh crore at the end of the second quarter (September,2016) before demonetisation increased to Rs.107.51 lakh crore in March, 2017 but declined by Rs.824 core to a level of Rs.107.50 lakh crore in June,2017. Deposits decreased by Rs.863 crore from September and stood at Rs.108.80 lakh crore at the end of October,2017.Banks have to now nourish their ability to lend by growth in deposits.
7.1. Details regarding the loss of jobs and decline in production following demonetisation have not been exactly computed. Particulars of new jobs creation are also not available.
7.2. Growth in Gross Domestic Product which stood at 7.9% before demonetisation declined to 5.7% in June,2017. Stating that demonetisation is the sole reasons for this is equivalent to simplifying complex economic factors; demonetisation must have been one reason.
8.1. In order to counter black money and fake currency and the subversive activities done using them our country should be able to make the rule of law more effective. To flush out black money hidden in the form of investments in land, buildings, valuable metals like gold and platinum , stock market securities and assets abroad, measures beyond demonetisation are necessary. Intermittent Amnesty schemes may encourage people to accumulate black money again.
8.2. Compared to the rates in many developed countries our tax rates are reasonable at present. It has to be ensured that all those who are required to pay taxes do pay. I have the experience of receiving refunds as per income tax returns filed online within three months; I also received a creditable rating in 2016 from the Income Tax Department for the first time in 45 years of paying taxes. The emergence of a culture which acknowledges that paying taxes is our dharma(sacred duty) and implementation of a fair and strict rule of law regime is what we require today.
(Cherian Varghese is former chairman of BIFR, Union Bank of India, Corporation Bank and South Indian Bank)