The announcement & the aftermath
If ever there has been a PM’s address to the nation as important as the one on the midnight of 15th August 1947, it is that of PM Modi on 8th November 2016 announcing the discontinuation of Rs. 500 and Rs. 1,000 currency notes. Whilst innumerable reactions started surfacing everywhere even before the PM completed his address, one of the most obvious one was this is a political stunt for the upcoming state elections. In the following days, one article went to the extent of blaming PM Modi for ‘stealing RBI’s thunder’ by announcing what was typically a monetary policy decision taken by the central bank of the country. The author’s alleged logic there was the PM probably wanted renewed publicity as the surgical strikes were fading quickly in public’s memory and the flak government had drawn in wake of their flip flop on the decision to roll back the one day ban of NDTV for their irresponsible coverage of the Pathankot terror attack. Nothing can be farther from truth than this theory in my opinion.
Although the BJP obviously stands to gain in the upcoming elections courtesy the government’s aggressive stance against the menace of the black money, as is evident from the municipal election results from some of the Western parts of the country, one cannot link PM’s decision to address the nation himself to make this announcement merely with the political gains he intended to achieve.
For, if the PM really wanted to reap political benefits from important events such as this one, he would have addressed the nation himself even to announce the surgical strikes conducted in PoK in light of the Uri terror attack. Nothing would have given him more popularity (not that he really needs it) than breaking the news of avenging the martyrdom of the soldiers killed in Uri and countless civilians in earlier similar attacks by the neighboring terrorist state. But that announcement was rightly done by the Director General of the Military Operations as they obviously deserved all the accolades for the fitting response they dished out to the country’s enemy. This decision stood vindicated even more in the light of the baseless questions raised around the surgical strikes by the self-proclaimed greatest ‘Anti-Corruption’ crusader of our times. One can only imagine how many more questions our myopic opposition political parties would have raised had the PM broken this news to the country instead of the military. This proves the point that we have a responsible and a mature leader in PM Modi at the helm of our country.
Based on this experience, one might agree with the logic of the author mentioned above that the RBI governor should have announced the currency ban as it was a monetary policy decision. While this is untrue even theoretically, one cannot even begin to imagine what would have transpired if the PM himself did not make this important announcement.
For starters, the political opposition and backlash demanding a rollback would have been immediate and much more severe from all the opposition parties. They would have readily gunned for the RBI governor stating the move is half baked and not well planned. Secondly, to discredit the government and this move, two distinct theories/questions would have been floated in the media– was the PM even involved in the decision making process on such an important matter or was he busy with his international ‘tours’? Or was this actually the PM’s idea but since he was not confident of its practical implementation, he used the RBI governor as a front to backstop the impact and questions on his governance style in case the move failed to see the light of the day. Last but certainly not the least by any means, anyone making this announcement other than the PM himself, would have found almost negligible support from the man on the street. So, in a nut shell, the entire move to target the multi-faceted shadow economy would have been a disaster, and worst of all it would have ended up giving the black money hoarders an opportunity to flush out their cash reserves and convert them into other type of assets to prepare for any future attempts by the government to target the black money.
Having expected all of this and more, the PM rightly took it on himself to make this important address. This way he ensured absolutely no communication gap in announcing the need for such a bold move and how exactly it would impact the nation. This also delivered a huge blow right from the word go on all the mischief mongers– opposition political parties, black money hoarders with deep pockets and contacts in the right places and most of all the biased sections of the media who got no chance to twist the facts or the Government’s intentions with this historic step. But the biggest positive impact the PM had was on the common man–the one who was to, and is still somewhat suffering from the impact of this unprecedented move to set the country’s economy right. While the immediate broad-based support to the PM’s move coming from across the nation and society at large, which has been struggling with unrelenting food inflation for almost a decade and ever spiraling corruption in various sections of the administration was not really a surprise to anyone, it was the after effects which the PMs address soothed really well. Faced with a daunting task of replacing the old denomination currency, the common man and the bankers are working relentlessly post a day’s break after the PM’s address. Such has been the enthusiasm of most of the people involved that queuing up outside the bank was even compared to a soldier’s duty who works for protecting us for the betterment of the nation. While the risk a soldier takes just by standing up for his fellow countrymen cannot be appreciated enough, such a dedication and calmness from the common man to support the government’s move surely would not have been achieved if anyone other than the PM addressed the nation on this unexpected move. So, it has bought some much needed time for the banking infrastructure in the country to replace the old currency in a structured manner and also for the tax authorities to keep an eye on huge depositors of old currency notes.
That the wind was knocked out of the opposition parties is very evident from their ever changing stance on the issue even seven weeks post the announcement. Except a couple of them who strongly oppose and couple of them who strongly support this move, the rest are still struggling to come up with an appropriate response.
Ultimate Destination or just the start of the domino effect?
One myth doing the rounds since the PM’s announcement on demonetization is this is probably the last of the salvo government has fired on the black money hoarders. Despite the fact, PM himself announced this is just the beginning at an election rally few days after November 8th, people and politicians at large have felt (or hoped in some cases) this is the final blow government had planned. But as always, irrespective of people’s perceptions, the government has proven beyond doubt that demonetization was indeed just pulling off a linchpin and they are closely monitoring the reactions from various sections of the society like businesses, politicians, hawala operators, etc. in its aftermath.
It is an alarming indicator for the government that even seven weeks after the initiation of demonetization, common people are queuing up outside the banks and ATMs to withdraw their own hard-earned money (although in increasingly smaller numbers). Moreover, this is happening despite the withdrawal limits and after repeated assurances from RBI and government that sufficient currency has been printed and distributed to banks across the length and breadth of the country. Rightly so, the government is trying to identify the root cause of this problem and all its economic wings are working with good co-ordination to identify and nail the culprits like some of the corrupt bank employees, touts and others who are helping the black money hoarders convert their illegitimate wealth from old currency into new. In the sixth week alone, since November 8th, close to Rs. 240 crores were seized in new currency from such raids across the country. Now, compared to the staggering valuation of some of the multi billion rupees worth of scams conducted during UPA II, this number might seem like small change, but one must realize that with a weekly withdrawal limit of Rs. 24,000 per account, this money would have been sufficient to cater to currency demand of as many as 100,000 account holders. And since not everyone utilizes the entire limit of Rs. 24,000 every week, realistically speaking, this sum of Rs. 240 crores would have actually catered to a lot more people across banks and ATMs throughout the country.
So, to those who are blaming the government and the RBI for mismanagement or lack of preparedness for such a massive crackdown on black money, they would be better served if they realize the amount of efforts the government and other state agencies are actually putting in to identify the systemic root cause of corruption and generation of black money in the economy. For, the number of successful raids we are seeing almost daily these days just proves the fact that the authorities are not shooting in the dark but are working with almost surgical (pun intended) accuracy based on stringent monitoring of people with unusual banking transactions and gold purchases post November 8th. A strategy which would surely have been in place even before the formal announcement of demonetization.
What this also proves is that even if demonetization by itself might not set everything right in our economy, it sure is exposing the termites which are proving to be the biggest hindrance in our country realizing its true potential in the global landscape. And the worst or the best part is the fact these termites are not merely limited to political parties but widely prevalent all around us.
50% tax rate for offenders: Did the entire country queue up outside banks and ATMs for a mere 5% more tax recovery than the earlier IDS?
This is one question which started bothering me and various other honest tax payers from the moment the 50% tax rate was announced for offenders who come forward even now and declare their unaccounted wealth. This is merely 5% more than the tax rate under the Income Declaration Scheme (IDS) concluded on September 30, 2016.
Did the entire country suffer through demonetization for a mere 5% additional tax recovery? Absolutely not.
For starters, this is not merely 5% more tax recovery but 50% more tax recovery, because whoever declares their unaccounted wealth now, is doing so because of the fear instilled in them with demonetization. Something which could serve the country well in the long run with lesser people wanting to run the risk of hoarding cash reserves accumulated through illegitimate means. Secondly, 50% is not the only amount of tax the offenders have to pay, they also have to let go of another 25% for an interest free period of four years in Pradhan Mantri Garib Kalyan Yojana (PMGKY), during which no interest shall be paid to them for that amount. If a FD interest rate of even 7% is compounded for four years on this 25% of the amount, the total comes to almost 8% of the total undeclared income. Since the offender shall not get this 8% interest, their effective tax rate is 58% (50% Tax + 8% Foregone interest). Although an additional 13% might still not justify the efforts a common man on the street has put in trying to withdraw their own money, it sure serves way better than a mere 5%, because it would also help finance the rural poor who rightly need this money. Lastly, one must not forget that once this 100% of undeclared amount has been accounted for, it would help the country’s economy to correctly reflect its size, growth rate, etc. Furthermore, now this entire amount would be legitimately in circulation through the economy.
Over and above all this, what this move has also done is brought about a change in the way society looks at their cash holdings and transactions. While there might have been a minor jump in the demand and hoarding of new currency notes because of the uncertainty around its availability, this additional demand is more than offset by the significant rise in cashless payments and digital transactions in general. This rise in cashless transactions is not merely because of shortage of currency but also because of a major change of habit in the way we look at day to day economic transactions. Only now are we realizing that close to 75% of our daily transactions can easily be taken care off through digital means and do not necessarily warrant an exchange of currency (at least in metro cities and surrounding suburban areas). This simple change of viewpoint would go a long way in bringing our economy back on track and improving transparency across the board.
The case for the need and benefits of demonetization are still as strong as they were before and on 8th November when this was announced. However, it is the short term pains it has generated along with the intentional misguidance by the opposition parties which is trying to take away the attention from the unchecked menace of our shadow economy. While we mention the short term pains this move has caused, it is also important to look at some of the immediate positives which have come out of this move.
- Kashmir has returned to normalcy almost across the state in less than seven days after demonetization was announced. This has happened after close to four months of unrest, curfews, stone pelting, torching of schools, etc. which resulted in the death of close to 100 people, including the Army personnel trying to control the protestors.
- A record 500+ Naxalites have already surrendered to the law enforcement agencies as they were left with no means to survive because they could not use their old 500 and 1000 rupee notes.
- The infiltration attempts by the Pakistani terrorists are significantly down as they are finding it difficult to get the new high denomination Indian currency. Although this could restart in the future, at least for now there is much needed respite and more importantly this move shows how big a factor monetary economics plays in a topic as complicated as terrorism.
While this is not a complete list of positives, it certainly highlights the most important ones.
So, while queuing up outside banks and ATMs is surely taxing, let us brace ourselves and continue doing what we have since 8th November to counter this social and economic evil, along with continuing to believe in our democratically chosen PM. For, unlike his predecessor, he certainly knows what he is doing.