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Friday, November 17, 2017

Self-defeating exercise

Thursday, 14 September 2017 11:58
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After the release of the Reserve Bank of India (RBI) report on number of high demonetised high value currency notes, it is now official that the demonetisation has totally and miserably failed to check black money in the country. In fact, RBI and the NDA government have lost more money from the scarce resources of the state exchequer in printing and circulating the new currency notes of Rs 2000 and Rs 500 in the market. No questions have been answered about the 100 plus lives lost after the demonetisation and other factors that contributed in slowing down the economy besides killing the rural and agriculture economy of the country post-demonetisation since November 8, 2016. In fact, not only the RBI but also the Union Finance Minister Arun Jaitley were taken by surprise when the Prime Minister Narendra Modi announced demonetisation of on that evening unilaterally creating a panic among the people in the country. On November 8, 2016, when Modi announced to the nation that Rs 500 and Rs 1,000 currency notes would cease to be legal tender from midnight, he was unequivocal in asserting that the measure was aimed at breaking 'the grip of corruption and black money'. Explaining his point of view how the shock move would work, he said: "The... notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper." The premise then was that a sizeable part of the Rs 15.44 lakh crore of the two high-value banknotes would remain in the hands of the holders and would not be tendered back into the banking system due to fear of punitive government action. There were hints that the windfall gains made from the redundant currency notes that couldn't be deposited in banks, estimated at anything between Rs 3 lakh crore to Rs 5 lakh crore, would be deployed for some important purposes - social welfare schemes and infrastructure projects. This would be affected with the RBI, which bears the liability to honour the value of the India's currency, paying as dividend to the government the majority, if not all, of its extinguished liabilities. But with the RBI's annual report, released on August 30, showing that as much as 98.96 percent of the demonetised currency had returned to the central bank as of June 30, the gains in the form of cancelled liability from the note ban have been nothing. The Finance Minister claim that the "confiscation of money" had not been an objective, and for his Ministry to say that the government "had expected all the Specified Bank Notes to come back to the banking system to become effectively usable currency," is discreditable. If that were indeed the case, the rationale behind the various unusual announcements that followed in the wake of the demonetisation decision are hard to digest. At one point of time, the RBI circular setting a Rs 5,000 limit on deposits of withdrawn notes unless done under the government's amnesty scheme, tendered for the first time or explained otherwise was clearly a measure intended to dissuade bank customers from returning the demonetised currency. It is acceptable that demonetisation has had some beneficial spin-offs such as arguably fostering greater compliance with the tax laws and reducing the economy's reliance on cash through increased adoption of digital payments. But these gains could have been achieved by other and less self-defeating ways. As things stand, it is unclear how many of those who have laundered their black money will be punished. It is also sad that the taxmen have only suspicions that out of the large amounts of money deposited in the banks only Rs 6000 crore or so could be the black money, which is just a fraction of the number of currency notes that came back into circulation. Despite the large amounts that were deposited in banks post-demonetisation, it is doubtful whether the Income Tax authorities have the necessary resources to track down and penalise the corrupt or those holding black money. At least, the costs of demonetisation, which has resulted in robbing the country of its economic momentum, are far greater than the benefits it has bestowed. In fact, the poor masses have been robbed off their financial autonomy also for no fault of theirs.


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