DEMONETISATION IS NOW PAYING DIVIDEND IN INDIA
With the next Indian parliamentary election only a few months away, critics of Narendra Modi government and opposition parties are leveling several criticisms and allegations which are not adequately backed by reliable facts and figures. In the coming months, it is likely that the criticisms will become more sharp and more vicious. With constant campaign by the critics and opposition parties, that are bordering on generating personal hatred against Mr. Modi and which are highlighted by the media and even supported to some extent by section of the media , it appears that atleast some section of the people will be carried away by such propaganda.
Of the several criticisms , the most focused one in the coming months would be the demonetization decision of the Modi government two years back.
What critics say ?
The demonetization decision is criticized on the following three counts.
The first criticism is that In the currency circulation of around Rs. 18.5 lakh crore, if almost the entire amount have been returned to the banking system after demonitisation as claimed by the Modi government, then it only means that there is no black money. Surprisingly, such criticism has been made even by the former Finance Minister in Manmohan Singh government , who should know better. He has asked “where is the black money?”
The second criticism is that the black money in India is more in the form of gold that is hoarded and cash invested in real estate. While demonetization was aimed at bringing out the black money in cash form, why has Modi government ignored the hoarded gold and tax evaded black money invested in real estate?.
The third criticism is that while it is claimed that demonetization has wiped out the black money, the ground reality is that black money is in circulation in India today and almost returning to the level of pre demonetization era.
Criticisms not based on sound logic :
A careful analysis would indicate that the above criticisms are not based on sound logic.
When almost the entire currency in circulation before demonetization, part of which was not routed through the banking system and was the tax evaded black money which contributed to parallel economy, was brought back into the banking system after demonetisation, the objective of the demonetization to wipe out the black money was largely achieved. The question of the former finance Minister “Where is the black money” is totally illogical.
The parallel economy was causing havoc in the country ,which contributed to high level of corruption and misuse of the tax evaded black money in the parallel economy for unlawful activities like fostering terrorism etc.
With regard to the criticism that the hoarded gold and real estate bought with the black money has not been attacked by the demonetization measure, the fact is that demonetization measure was followed by several steps to curb the corruption, of which one of the important one was anti benami Act. After the promulgation of anti benami act, around 17,000 high value real estate transactions were attached by the government, which means that the owners were deprived of the property and the money invested by them in such real estate was lost.
With regard to the hoarded gold, Modi government has launched around 35,000 surveys to locate such hoarded gold , cash etc. and has already seized around Rs.. 4000 crore worth of gold and cash hoarded. The tax evaders have confessed with regard to the undisclosed income of around Rs. 52000 crore. For all this money, they have been paying heavy penalty to the government.
Demonetisation yielding dividend :
The demonetization measures are yielding results, as the number of those who have submitted returns to the income tax authorities which was 3.8 crore in the year 2014 has now reached 6.86 crore during Modi government’s four and half years of governance. In this four and half years, the number of persons who have paid income tax have gone up from 6.4 million in 2014 to 12.4 million in 2018. In other words, in the last sixty years till 2014, only 6.4 million people were paying taxes. Now, after the four and half years of Modi governance, the number of tax payers have gone up by around 100% to around 12.4 million.
The above figures are highly impressive showing that demonetization measures are paying dividend, which has resulted in significantly expanding the tax base in India and the income tax collected.
How poor people benefited by demonetization ?:
The critics ask as to how the poor people have been benefited by demonetization measures and they claim that the poor people have suffered. On the other hand, the fact is that Modi government has launched many proactive programmes to help the cause of poor people such as construction of thousands of toilets for poor house holds, construction of houses for people belonging to lower income group, construction of hundreds of kilometres of road ways, extension of electrification to several villages and remote areas and others. Large investments are going into such essentially welfare oriented projects and such investments have been possible due to the money collected after demonetization by way of taxes, recovery of hoarded money and penalty imposed on undisclosed income. Most of these investments have been managed without imposing additional taxes and even the income tax slab rates are being steadily reduced. Modi government’s scheme to introduce health insurance for poor is a measure of great significance and importance.
Wiping out shell companies :
While introducing the demonetization measure, Prime Minister Narendra Modi clearly and categorically said that demonetization measure is only the first step in rooting out the corruption and many more stringent measures would be followed. True to his words, he introduced number of anti corruption schemes.
Amongst many measures, one of the most significant one is the identification of shell companies and forcing their closure. In the past, several operating companies have floated other letter pad companies that have bank account but little or no operation. Such letter pad companies were used by the company owners to divert part of the income of the operating companies to these non operating letter pad companies, which are called as shell companies. When Modi government insisted that all companies should submit their PAN number to the banks which were linked to the mobile number of company owners and their Aaadhar number, the companies without PAN number were identified and removed. The money in possession of shell companies in the bank are frozen. Further, directors of shell companies were largely barred from acting as directors in other companies. So far, around two lakh of such shell companies have been closed and another around two lakh companies are being investigated. This is one of the very important steps in rooting out corruption.
Bankruptcy law :
Another significant step initiated by Modi government is the introduction of Insolvency and Bankruptcy Law. Earlier, when companies became sick and defaulted in paying interest and principal amount to the banks , the companies got closed and employees were thrown out of jobs. But, the owners of companies went almost scot free and were not deprived of their assets.
With the introduction of Bankruptcy law, when the companies default in payment to the financial institutions, the matter is referred to the Insolvency Board and the owners are divested of the ownership of such companies and proposals to take over of such companies by other companies are invited.
Fearing such law, around 23000 companies have now come forward to settle their accounts with the financing institutions ,which resulted in financing institutions receiving about Rs. 83,000 crore after the introduction of Insolvency and Bankruptcy Law.
Need for holistic view of demonetization:
It is necessary to view the demonetization measure not as an isolated step to root out corruption and black money but as part of the several other measures to achieve this objective. Demonetisation measure is a first step and mother of the reform measures to root out corruption. Therefore, it is necessary to take a holistic view of the demonetization strategy of Modi government.
More measures needed :
With regard to the criticism that the black money is now being generated even after demonetization measure, one has to accept that this is a fact. Obviously, the corruption is deep rooted in Indian society and seem to have become part of life. There are many cases where bribe givers are also bribe takers and the distinction is becoming thinner. In such circumstances, the remedy is introduction of more stringent measures similar to what have been taken in the last four and half years by Modi government.
Finally, it needs to be recognized that demonetization measure as such is sound in principle and there is no need to be apologetic about this.
Criticism in vacuum :
Former Prime Minister Dr. Manmohan Singh has criticized the demonetization measure in harsh terms. However, he has not suggested any alternate method to bring out the tax evaded black money into banking system. Is the job of Dr. Manmohan Singh done by criticizing demonetization measure but not suggesting any alternate strategy? Is it not criticism in vacuum?
(Author N. S. Venkataraman is a trustee with the “Nandini Voice for the Deprived,” a not-for-profit organization that aims to highlight the problems of downtrodden and deprived people and support their cause. To promote probity and ethical values in private and public life and to deliberate on socio-economic issues in a dispassionate and objective manner.)
Published Date: Saturday, November 10th, 2018 | 11:12 PM