Note Ban: The Positives

Source: The Hitavada      Date: 13 Dec 2017 11:47:33

By By Ramesh Kanitkar,


Before demonetisation, the currency in circulation, by value, was about Rs 17.97 lakh crore, which reduced to Rs. 16.35 lakh crore in October 2017, which means there is no significant difference between the currency in circulation pre-demonetisation and one year after demonetisation. But more than the quantum of currency in circulation, the ratio of the value of smaller denominations in the total value of the currency in circulation is vital to sustain the benefit of demonetisation.

THERE could have been two outcomes of demonetisation. The first could have been that sizable demonetised currency, to the tune of, say, Rs. 2-3 lakh crore, did not come back into the banking system, and that amount would have turned into a one-time bonanza for the government. That outcome did not come to pass. If people had buried their unaccounted cash, they would have also successfully hidden information regarding their unaccounted money from the radar of the Income Tax department and other government agencies, and therefore reduced the scope for unearthing black wealth. That, too, did not happen.


The second possibility was that almost all the demonetised currency would return to the banks. Which is what happened.
There was no one-time bonanza for the government. Should this fact be interpreted to say that the demonetisation exercise by itself is a failure on all accounts?


No, because people who had been holding unaccounted wealth deposited at least a part of their holdings in the banks in the hope that the government agencies, both at the Centre and the states, would not be able to cobble together various pieces of information pertaining to their unaccounted wealth, which is disproportionate to their disclosed sources of income, and so would never be able to act against them.


This is where people who held unaccounted wealth gave away clues to the agencies that are supposed to unearth unaccounted wealth.
The information that has been scrutinised so far and the consequent action, post-demonetisation, is just the tip of the iceberg.


The entire iceberg can be exposed, if the departments at the Centre and in the states who, by various means, should have data pertaining to huge expenditures and property purchases by these holders of unaccounted wealth, pursue the data proactively, without resorting to blackmail and corruption.


There is a huge scope for agencies like Income Tax and the Enforcement Directorate of the Union government and investigating/monitoring agencies like the CBI, CVC, and state government agencies like the property registration department, to share data among themselves and work in unison to unearth unaccounted wealth. The arrival of Aadhaar and linking Aadhaar to every major transaction, along with the clues on the deposited demonetised cash would help the mission of unearthing unaccounted wealth.


In the absence of Aadhaar, past, present and future data would be in isolation and hence remain unusable. The mandatory mention of Aadhaar number in all major expenditure, both movable and non-movable, and for property registration - both for the new assets acquired and the old assets already registered -- would make an enormous difference in coordinating the efforts of various agencies and push for punitive action against those who evaded taxes for years together and accumulated unaccounted wealth.


To avoid cash transactions in property buying, the government must have a clear policy on the quantum of circulation of currency and its denominations.
Before demonetisation, the currency in circulation, by value, was about Rs 17.97 lakh crore, which reduced to Rs. 16.35 lakh crore in October 2017, which means there is no significant difference between the currency in circulation pre-demonetisation and one year after demonetisation.


But more than the quantum of currency in circulation, the ratio of the value of smaller denominations in the total value of the currency in circulation is vital to sustain the benefit of demonetisation.


The denominations of upto Rs. 100 formed about 14 per cent of the total value of the currency in circulation before demonetisation. A year later, it has increased to 28 per cent. However, the Indian Government and the RBI should go much further in having almost the entire currency in circulation only in denominations upto Rs. 100. That means, Rs. 2,000 and Rs. 500 notes must be withdrawn from circulation gradually.


There are two constraints to implementing this. The first constraint is the expenditure involved in printing lower denomination currency in comparison with higher denomination currency.


The Rs. 2,000 and Rs. 500 notes constitute about Rs. 10 lakh crore in circulation at present. To replace these currencies, say with Rs. 100, the RBI needs to print 10,000 crore Rs. 100 notes, which would cost it Rs. 20,000 crore. But when compared to the benefits in terms of stopping people from accumulating currency of high denominations and using it to acquire unaccounted wealth, this expenditure is small.


The second constraint is the time taken to print 10,000 crore Rs. 100 notes. The existing printing facilities at Nashik (Maharashtra), Dewas (Madhya Pradesh), Salboni (West Bengal) and Mysuru (Karnataka) can print about 2,500 crore currency notes in a year by operating two shifts a day. At this rate, it would take at least four years to replace all the existing Rs. 2,000 and Rs. 500 notes with Rs. 100 notes, unless the RBI decides to outsource the printing to some foreign printing companies.


However, the sooner the RBI replaces the larger denominations, the better it would be to garner the benefits of demonetisation.


The best way to push people to use digital mode for higher value transactions is to reduce the availability of larger denomination notes. In a nutshell, the RBI's proactiveness in increasing the smaller denomination currencies and the Income Tax department's proactiveness, in coordination with other departments in the state and Union governments, in deciphering the big data that was thrown at them by the depositors of demonetised currencies, will determine whether or not demonetisation will yield the desired results for India.