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Prof.K.Nageshwar: Two Years after Demonetisation : How Modi’s Claims proved to be Farcical


The demonetisation was the biggest economic policy measure of Narendra Modi government. Big hopes were created in the minds of people that economy will have innumerable benefits due to this far reaching policy measure, prominent among them is the unearthing of black money. However, the government and its economic apologetics soon changed the goal posts and claimed that demonetisation is for driving the nation towards cash less economy. The government’s argument was that corruption and all the other economic malaises were the result of high incidence of cash in the economy. Of course yet another claim was that demonetisation will increase tax compliance resulting in the generation of less and less black money as the illicit wealth and income holders will be scared to hide their income. What is the experience after two years of demonetisation?

The RBI data reveals that over 99 percent of demonetised currency has actually came back to the banks indicating a process of black money converted into white, thanks to demonetisation. The government in an affidavit to Supreme Court estimated that at least three lakh cores of black money will not return to the banking system. The reality is that hardly ten thousand cores have not returned indicating that demonetisation is an exercise in money laundering.

The protagonists of demonetisation argued that it helped to reduce the cash in circulation in the economy. Look at the following statistics culled out from official reports like the Annual Reports of the Reserve bank of India (RBI).

Cash to GDP ratio in India was 12.2 percent in 2015-16. It declined to 8.8 percent in 2016-17 post demonetisation. It again rose to 10.9 percent in 2017-18 and in June 2018, it further increased to 11.30 percent of GDP. The rising trend indicates that it is expected to be over 12 percent by the end of this financial year, the level at which the cash per GDP ratio stood prior to demonetisation. Currency circulation on November, 4, 2016 stood at 17.98 lakh crores. It declined to 8.98 lakh crore in January 6, 2017 as 86 percent of the then cash in circulation was taken out due to demonetisation. But, the cash in circulation in India increased to 19.68 lakh crore in October, 19, 2018, much above the level reported at the time of demonetisation.

The claim that high incidence of Cash in the economy necessarily increases corruption is fallacious if one looks at the international experience.

Cash to GDP ratio in Nigeria is 1.85 percent, India over 11 percent, Japan 19.4 percent, Singapore is around 10 percent. Should we conclude that Nigeria is less corrupt nation compared to India or Japan is more corrupt nation than India or Nigeria?

The afterthought of the ruling dispensation is that Taxes increased due to demonetisation. But look at the statistics from official sources to understand the political economy of taxation and demonetisation.

Direct Tax to GDP ratio was 5.81 percent in 2010-11 and increased to 5.98 percent in 2017-18. Direct tax collections stood at over 10 lakh crores in 2017-18 which is 18 percent higher than the previous year. But, direct taxes as proportion of total taxes remained at 52.29 percent which is below compared to 2014

But, indirect taxes to GDP increased from 4.48 percent in 2010-11 to 5.46 percent in 2017-18. Total Tax to GDP ratio was 11.3 percent in 2010-11 and increased to mere 11.44 percent in 2017-18. This shows that the overall taxes have not registered any major change. In fact the direct taxes whose evasion leads to the generation of black money rose much less compared to indirect taxes paid by common man for consuming the goods and services.

In fact, Corporate tax to GDP ratio fell from 3.89 percent in 2010-11 to 3.40 in 2017-18

On the other hand, Personal Income Tax rose from 1.9 percent in 2010-11 to 2.5 percent in 2017-18. 1.26 crore more taxpayers have been added in 2016-17. This is about 26% higher than the number of taxpayers added in 2015-16, when 99.98 lakh new taxpayers were added. The number of new taxpayers added in 2015-16 was also about 27.5% higher than that in 2014-15, when 78.37 lakh new taxpayers were added. The Economic Survey 2016-17 has shown that the average income reported by the new individual taxpayers added in 2016-17 was Rs 2.7 lakh.

The broad conclusions that can be drawn from these figures are as follows. There is no increase in the levels of tax collections due to demonetisation. Tax compliance has increased only in the case of salaried individuals who come under personal income tax regime. The corporates who are the main culprits in the generation of black money did not show any significant tax compliance and in fact their share has come down .

( Prof.K. Nageshwar is India’s noted political analyst. He is a former member of the Telangana Legislative Council and professor in the Department of Communication & Journalism, Osmania University, Hyderabad, India )

For More Views on Demonetisation: https://www.youtube.com/watch?v=6Z-NH4YfK7Q

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Actor Prakash Raj wants apology for note ban


A year since the implementation of demonetisation, actor-filmmaker Prakash Raj on Wednesday demanded an apology from the central government for committing the “biggest blunder”.

In a post titled “To whomsoever it may concern”, Prakash wrote on Twitter: “While the rich found ways to convert their black money into shiny new notes, this disruptive impact made millions suffer helplessly and the unorganised sector workers went for spin. Would you mind saying sorry for the biggest blunder of our time?”

On November 8, 2016, Prime Minister Narendra Modi announced demonetisation of Rs 500 and Rs 1,000 notes which, he said, was aimed at “eradicating black money and terror funding”.

Last week, Prakash — a popular name in the Kannada, Telugu and Tamil film industries — supported actor Kamal Haasan’s views on “Hindu extremists”.

A month ago, Prakash had also condemned the “silence” of Modi on certain sections “celebrating” the murder of journalist Gauri Lankesh in Bengaluru on social media. He had said Modi’s silence was “chilling”.

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Demonetisation’s short-term costs were high, long-term benefit doubtful


Demonetisation’s short-term costs were high, long-term benefit doubtful

When Raghuram Rajan, former governor of the Reserve Bank of India (RBI), cautioned the government against demonetisation, saying short-term economic costs would outweigh long-term benefits, he was not trying to be prophetic. But a year after Prime Minister Narendra Modi made that fateful announcement in a nationwide broadcast on the evening of November 8, it would seem Rajan’s words had actually become so.

As economists and analysts, corporate honchos and statisticians struggle to gauge the beneficial impact of demonetisation, many of the objectives claimed by the government have fallen by the wayside. New claims and afterthoughts on the note ban by senior politicians in power have remained unconvincing. Demonetisation has raised more questions than it has answered.

The Prime Minister, in banning 1,000 and 500-rupee notes — or 86 per cent of total currency in circulation — had indicated that the decision would help remove black money from the system, rein in terrorism and take fake currency out of circulation. Have these objectives been met?

“Demonetisation was an utter failure. Theoretically it was known it cannot be successful. It could not remove black money, but in turn it has damaged the white economy and growth,” Arun Kumar, former professor of economics at the Jawaharlal Nehru University (JNU) told IANS.

The benefits of the decision are yet to percolate to the economy, but the disruption as well as pain that it caused to hundreds of millions was very real, whose lingering effects are seen to this day and, which, at that time, had shaken the country to its core, touching nearly every citizen and visitor.

The overnight serpentine queues for weeks in front of banks, the loss of over a hundred lives in the effort to withdraw one’s own money or change it, and the desperate desire to ensure that cash in hand did not turn to ash took its toll across the country. Was it worth it?

“The government made the elementary mistake of believing that black money is kept in cash. Black wealth can be transacted by non-cash means as well,” said Kumar, who is now Chair-Professor with the Institute of Social Sciences. “Only three per cent of Indians generate substantial black money. But for this, the other 97 per cent had to face the consequences of demonetisation.”

After months of vacillating, and being less than honest with citizens, RBI data in August 2017 said that 99 per cent of the banned currency in high denomination notes had returned to the banking system — Rs 15.28 lakh crore out of the Rs 15.44 lakh crore in circulation on November 8, 2016. The calculation does not take into account the money changed by people in Nepal, where it’s legal tender, or old notes held by many non-resident Indians who could not exchange it within the deadline.

“Indian demonetisation was remarkable, because unlike many countries that faced major economic and political problems after even less drastic measures, this passed off peacefully as most Indians accepted the (wrong) argument that this would end corruption,” Jayati Ghosh, Economics Professor at JNU, told IANS.

“The initial reasons the government had advanced for this move, of reducing terrorism and eliminating both black money and corruption, were rapidly abandoned for other supposed goals, which are also yet to be met. There was no planning before unleashing such a big decision,” she added.

The difficulty in making a cost-benefit analysis is that the move was not purely economic, given the fact that the currency issuer — the RBI — had no role in the decision, as testified by Rajan.

Demonetisation comes across more as a measure of political economy which may appear, on the face of it, to have paid immediate political dividend to the Prime Minister and his party in the Uttar Pradesh elections this year. But the medium-to long-term picture would take a while to clear up, though short-term impact has already taken its toll on growth.

At the end of May, the Central Statistics Office announced that the GDP during the fourth quarter ending in March this year, fell sharply to 6.1 per cent from seven per cent in the previous quarter, while growth for the year as a whole was also expected to decline correspondingly. India’s GDP during the past fiscal grew at 7.1 per cent — at a rate lower than the eight per cent achieved in 2015-16. In terms of gross value added, which excludes taxes but includes subsidies, the growth came in even lower at 5.6 percent over 2015-16.

“Demonetisation is a textbook example of what happens when you remove liquidity that is the basis of transactions. The immediate result was that people didn’t have money even for small transactions. This had a strong negative multiplier effect, most evident in the informal sector,” Ghosh said.

“Cash is the means of transaction in the unorganised sector, which contributes 45 per cent to the GDP. The unorganised sector got hit by 60-80 per cent,” Kumar said, adding that the country went through a negative rate of growth in November-December 2016.

In October, the International Monetary Fund said in its latest World Economic Outlook that India’s economic growth for 2017 and 2018 would be slower than earlier projections. The report cited the “lingering impact” of demonetisation and the Goods and Services Tax (GST) for the expected slowdown, projecting a growth of 6.7 per cent in 2017 and 7.4 per cent in 2018 — 0.5 and 0.3 percentage points less, respectively, than earlier projections.

Ghosh said that the steps on demonetisation, taken together, “generated a perfect recipe for slowdown in the economy. In fact the slowdown is likely to be much sharper than estimated because the quick GDP estimates are based on formal economic activity, and the adverse impact on informal activities have not really been taken into account”.

Ranen Banerjee, Partner & Leader, Public Finance and Economics, at PricewaterhouseCoopers (PwC) feels the country was already cooling down when the note ban came in, and it would take some time to evaluate its impact on the macro economy. “About three to four quarters prior to demonetisation growth rates were already on a sliding path. It could well be that the economy was cooling down and the trend has continued. Attributing the slowdown solely on demonetisation is not possible as we do not have sufficient data points,” Banerjee told IANS.

Economist Dipankar Dasgupta, former professor of economics at the Indian Statistical Institute, said that although GDP in India is not calculated in a very comprehensive manner, the trend growth rate continued to be “pretty robust”. However, despite the claim by the government of ending corruption through demonetisation, “day-to-day bribes are still being taken through cash”, Dasgupta told IANS.

The objectives of dealing a blow to militancy and curbing fake money too seems not to have been met, as can be seen in Jammu and Kashmir, where, ironically, more incidents of militancy have been seen after demonetisation. “Logistics like shelter, passage and cash are mostly routed through over-ground workers and sympathisers of militants and those who could arrange high value notes in the previous system are doing so at present as well”, a senior intelligence officer told IANS in Srinagar on condition of anonymity.

Similarly, about fake currency, officials said the notes carried by militants from across the border were sophisticated copies and those who made them earlier could easily make fakes of the new currencies.

Perhaps there has been some beneficial fallout on the digital economy. Industry stakeholders feel that though the note-ban drive gave the necessary impetus to citizens to start adopting online payment platforms, a lot needs to be done by both the government and the industry to make it a success.

But was the country-wide upheaval worth it to make people adopt more digital transactions? No jury would need to deliberate for long on such a question.

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Demonetisation may have hurt more than it helped


It will take time for the economists to figure out whether the fall in the growth rate to 5.7 per cent is the result of the disruption caused by demonetisation and the Goods and Services Tax (GST), but most of the common people will see a connection between the two steps and a slowing down of the economy.

For most of them, the GST seems right — like the uniform civil code in another field of national life notwithstanding the teething troubles — but the jury is out on whether demonetisation was necessary if only because 99 per cent of the banned currency has been returned to the government.

Even if this means that those with unearned incomes have chosen to deposit their money in the bank, the question will remain whether the huge disruption caused by demonetisation was required to ferret out these holders of black money, especially when their numbers cannot be too large since most of the dubious earnings is not kept in cash but invested in gold, jewellery and real estate.

The claim that counterfeit currency will be detected by demonetisation has also been disproved by the fact that the amount of such notes that has been turned in is a mere 0.0007 per cent of the total.

If the government’s intention in wiping out 86 per cent of the currency in circulation in one fell swoop was the result of the failure to keep Narendra Modi’s election-eve promise of depositing Rs 15 lakh in each bank account by unearthing black money, it can only be described as a “monumental misjudgement”, as Manmohan Singh called demonetisation.

It is not surprising, therefore, that the government has changed its line from the initial justification of demonetisation as a means of breaking the back of the so-called parallel economy to that of converting the country into a cashless, digital economy.

However, even if this second objective is laudable, the unanswered question remains whether the shock and awe of demonetisation were necessary considering that more than 100 people died while standing in queues before banks and how an unknown number of small businesses suffered. According to one estimate, five million jobs were lost.

The fact that the people in general and the banking system have got back to their feet is a tribute more to their resilience than to the government’s wisdom. But what is undeniable is that they have been put through a wringer, as it were, when the ultimate gain in terms of cleansing the system has been negligible.

It is obvious that the same ends of trapping the hoarders of black money and nudging the country towards the greater use of plastic cards could have been achieved by far more carefully devised ways by experts which would not have caused the kind of turmoil set off by the sudden sweeping of the economy by the broom of demonetisation.

The utility of this reckless intervention is all the more doubtful since the Bharatiya Janata Party’s (BJP) claim that demonetisation paid it political dividends is not foolproof.

For instance, the party’s record in winning elections in 2017 is 3-2 considering that it lost in Punjab and came second in Goa and Manipur while winning in Uttar Pradesh and Uttarakhand.

It is another matter that the BJP negated the outcomes in Goa and Manipur by some adroit manoeuvres in horse-trading in order to secure the allegiance of MLAs susceptible to enticements. But the original score line showed that demonetisation was not a booster for the BJP.

It is also unclear to what extent the dramatic step of November 8 last year has been a damper for terrorism and Maoism since Kashmir remains on the boil while the decline in the incidents of Maoist outrages from 155 in 2014 to 118 in 2015 to 69 in 2016 can be ascribed to a natural process caused by the gearing up of the official machinery and the realisation among the insurgents about the futility of their cause. Demonetisation, therefore, can hardly be advanced as a reason.

The worry for the government at present will be about the fall in the growth rate as it will rob the country of its claim of being the fastest-growing economy and accentuate the phenomenon of jobless growth.

It is the failure to rev up the employment scene which is making the government turn to the customary measures of wooing vote banks by expanding the ambit of the creamy layer for the backward castes and firming up the BJP’s electoral tactic of enticing the non-Yadav backward castes to its side through a sub-categorization of these groups. But in the ultimate analysis, only a buoyant economy can help the ruling party’s political fortunes.

If demonetisation has put paid to such hopes in the near future — although the new Niti Aayog vice-chairman, Rajiv Kumar, has called a link between the falling growth rate and demonetisation “spurious” — the government will have only itself to blame.

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99% of the demonetised notes back into the banking system


Reserve Bank of India disclosed that about 99% of the banned Rs 500 and Rs 1,000 notes have returned into the system. Following Prime Minister Narendra Modi’s massive demonetisation drive to counter black money last year, a total of Rs 15.28 lakh crore of the Rs 15.44 lakh crore in circulation have returned by June30,2017.

About Rs 16000 crore of the demonetised notes did not come back. The report stated that Rs 8,900 crore of Rs 1000 notes have not yet come back into the system. On the contrary, RBI spent Rs 7,965 crore on printing new currency notes in 2016-17.

Overall currency circulation had come down by 20.2% at the end of March. RBI pumped in 2380 crore notes in circulation between Nov 9-Dec 31.

Total currency in circulation is at Rs 13102 lakh crore and 50.2% of Rs 2000 notes that are in circulation as of end March 2017.

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90% of scrapped notes back in system, big dividend unlikely


NEW DELHI: Of the Rs 15.4 lakh crore worth of Rs 500 and Rs 1,000 notes that were scrapped as a resulted of PM Narendra Modi’s November 8 declaration , as much as Rs 14 lakh crore has been deposited in banks.

The value of scrapped currency exceeded the government’s expectation that as much as Rs 3 lakh crore will not be returned as this would be part of black money hoards.

This also means that expectation that RBI will be able to give a substantial dividend to the government will be belied. While the value of deposits indicates that ways were found to deposit unaccounted money, the government expects to gain tax revenues from large deposits above the prescribed Rs 2.5 lakh per individual limit.

The government also sees gains from small savings that were kept in households being deposited in bank accounts that make these funds productive and safe.

The government has announced a scheme that provides for a 50% penalty for voluntary disclosure of deposits in excess of allowed limits with 25% of the funds to be placed in a fund for welfare of the poor for four years.

Officials said the government expected that such diclosures will also add to revenues even as money become available for more productive use, eventually leading to cheaper funds.

Source – Times of India

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