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Monday, November 19, 2018


By on Monday, November 19, 2018

By Umashanker Singh; IFS, PhD  
Majority of us probably may not be knowing as yet that how many central schemes do we have in our country as various Government Schemes have been launched since 2014 for the welfare of citizens of the country; but we are not sure that how far have we gone in to it and its impact assessment requires to be done by any independent agency in order to bring about transparency. These schemes can be operational at the State level, Central level or at, Central and State both.
I was surprised to see that Government of India has launched as many as 83 schemes till date, but have not found any noticeable impact on the economy. Demonetization was one of the schemes launched on the fateful evening of November the 8 th, 2016. This yet more surprising to all of us that why central government did not celebrate the second anniversary of demonetisation, one of its biggest policy initiatives while it has celebrated the anniversary of all other big policies? Why this step motherly treatment to one of the Prime Minister Brain child?
The stated objective of the demonetisation by the prime minister was as below:
1-The most important objective of the demonetisation was to eradicate black money from the Indian economy.
2- To lower the cash circulation in the country which "is directly related to corruption in our country,” according to Prime Minister.
3-The third most important objective was to eliminate fake currency and dodgy funds which have been used by terror groups to fund terrorism in India.
When it appeared to the government that bulk of illegal currency might return to the banking system, it began shifting the goalposts by adding new objectives of demonetization move. 
Hence, policy objectives such as promoting digital transactions and taking country towards a “cashless” economy (subsequently modified to a “less-cash” economy) were added later. The goal to make India a cashless economy seems more as an afterthought plan. These objectives, despite desirable, were not listed in the earlier official notifications. 
Now the interesting fact is something else which did not come out at the time of demonetisation. The Minutes of the RBI Board Meeting on November 8, 2016, that recommended demonetisation had made it clear that demonetisation was not the way to tackle black money or counterfeit currency. 
Thus, two of the main objectives that were emphasised in the PM’s announcement on demonetisation were undermined the very day the policy was announced. No wonder, soon after it became clear the money was flooding into the banks, the government started talking of a cashless economy and later on it was said that these deposits would create a paper trail and black money generation would become difficult .
Initially, there was a spurt in the use of electronic means of transactions; but this pace could not be sustained as more currency became available. The country had anyhow been slowly moving toward a less cash economy prior to demonetisation and this has continued. 
It was said that the government would restrict currency in circulation to less than what existed on November 7, 2016. But now the currency in circulation is about 10 per cent more than the Rs18 lakh crore that existed prior to demonetisation. To be fair, it is less than what it would have been if the increase in currency in circulation had continued at the pace prior to demonetisation. Now the finance minister has cited three achievements of demonetisation namely,
Increase in currency in circulation had continued at the pace prior to demonetisation. Now the finance minister has cited three achievements of demonetisation namely,
1-    An increase in digital transactions.
2-     Expansion in the tax base with more people paying taxes.
3-    Thirdly, the creation of paper trails that will make it difficult to generate black incomes in the future.
Interestingly, echoing the RBI Board, he said confiscation of currency was not an objective of demonetisation. The line earlier was that black money, held in the form of high denomination notes, would not return to banks since that would create paper trails. The then Attorney General had told the Supreme Court that Rs 3 to 4 lakh crore would not return to the banks.
 Soon it became clear that all the money would come back since those holding black money had worked out ways of converting their old notes to new notes. The government then started saying that was good since the people who had deposited large sums of money could be investigated.
 Now try to understand how the government is trying to hedge its failure of a decision which has ruined many of us in term of economy. The government has issued about 18 lakh notices to those who had deposited more than Rs 5 lakh into their bank accounts.
However, there is a misperception that equates cash with black money. Cash is needed by businesses as working capital and households keep cash in hand for transactions and as a precaution against contingency. So, a petrol station may have deposited Rs 20 crore in the demonetisation period of 50 days, based on its daily collections. This is not black money. Most of those who deposited large sums of cash would have worked out how to show the deposits as cash in hand in their balance sheet. So, it would be difficult for the tax department to prove that the money deposited was black.
Finally, data shows that the department does not have the capacity to audit so many accounts, in addition to the usual audits it conducts and most importantly despite the facts being otherwise, the government keep saying that they have taken action against people having black money and income tax law will take its own course in due time.
Yes, the number of returns being filed and tax being collected have increased. But, the direct tax to GDP ratio has hardly increased compared to the pre-demonetisation period. The black economy is more than 60 per cent of the GDP and even if 10 per cent of it had come into the tax net, it would have yielded 2 per cent of the GDP as additional tax collection. This has not happened.
Even when we consider collection of direct taxes within the country, there seems to be a broad correspondence between levels of per capita income and per capita tax collections. As the chart below shows, the richest states of the country—Delhi and Maharashtra—lead the league tables in terms of tax collection. Some of the states with the lowest per capita incomes—such as Bihar and Uttar Pradesh—tend to contribute lower amounts of direct taxes (in per capita terms).
Thus, the most potent solution for raising India’s tax-GDP ratio is to raise economic growth and average incomes. India’s recent economic history also bears testimony to this finding. As the chart below shows, tax-GDP ratio of the country rose the fastest during the boom years of 2002-08. It is well-known that 67 per cent of those in the tax net file either nil return or very low returns. The effective number of taxpayers has always been low in India. Even in the case of GST, the FM is on record saying that 5 per cent of those under GST pay 95 per cent of the tax.
Further, he has lamented that even though 1.1 crore have registered under GST, only about 67 per cent pay tax. The spurt in filing of returns is partly due to the fine being imposed from this year for late filing. So, many more have filed returns in time. Earlier many waited till March 31 to file returns. The numbers have also increased because of the increase in salaries after the implementation of the Seventh Pay Commission report.
However, most of the increase will be in the category of those who have just entered the tax net. So, the increase in tax collection will not be much. The increase in the number of those who filed tax returns is a result of other factors, and only marginally due to demonetisation.
Increased digitisation could have been achieved without causing pain to the economy. Nigeria has a low cash GDP ratio but a big black economy. Japan has a high cash GDP ratio but a small black economy. So, digitisation does not necessarily check black income generation. Finally, formalisation does not help reduce the black economy since the informal sector hardly generates any black incomes. Most incomes in this sector are way below the taxable limit which is rather high in India at three times the per capita income— with concessions and deductions it can be five times the per capital income.