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Year After Demonetisation:HUGE LOSS FOR GOVT, PEOPLE, by Shivaji Sarkar, 12 November 2018 Print E-mail

Economic Highlight

New Delhi, 12 November 2018

Year After Demonetisation

HUGE LOSS FOR GOVT, PEOPLE 

By Shivaji Sarkar

 

Two years, lots of speculation and India is still trying to assess the benefits of invalidated currency of Rs 15.41 lakh crore. There are benefits. It has, as per the Government, reduced black money, widened tax base, 14,000 high-value properties brought under scanner, lakhs of shell firms detected, 300 benami properties identified, 18 lakh suspicious transactions spotted, cash to GDP ratio declines.

 

The Central Board of Direct Taxes (CBDT) says that the I-T collection has increased to Rs 10.03 lakh crore 2017-18. A record number of 6.92 crore I-T returns were filed. This was 1.31 crore more than 5.61 crore returns filed in 2016-17.

 

It looks good. But the taxpayer is less than five per cent of the population. All I-T return filers do not pay tax and a majority of them a measly sum. In 2013, CBDT data shows, only about 1 per cent of India's population paid I-T. Even at 6.92 crore it means a mere 5.3 per cent of the people file returns. Actual taxpayers are far less. The cost is too huge to manage the I-T operations at 130 per cent of the taxes collected, according to a NIPFP study. If I-T is given up the government and taxpayers can save more and contribute to the growth.

 

In a country of 130 crore, detecting just 14,000 high value -- of above Rs 1 crore -- properties is not a big number. An average flat in even Delhi’s suburbs cost around a crore of rupees. The question is why it was not found in routine departmental operations and who is to be blamed for it?

 

All the companies that are deregistered every year are not shell companies. So projecting all de-registrations, as the taxman is trying to tell the Government, are not that of shell companies, though truly many are.

 

Again it is just 300 benami properties such a big number? Either it means benami is a miniscule operation or is being too hyped or the taxman could not go down to the crux. Similarly mere 18 lakh suspicious currency swaps during demonetisation is not a big number. Not all finally would prove after chaffing the details to be wary transactions.

 

The CBDT apparently is trying to overplay. The additional income-tax payers are at the threshold level at Rs 2.7 lakh a year, the Economic Survey (ES) 2016-17 pointed out. It raises a question whether such low earners should be taxed at all. Abolition of the I-T would earn the government more money, stop unnecessary harassment and add to faster growth, a dire need after the 2016-17 slow down.

 

The then Chief Economic Adviser Arvind Subramanian had said that after demonetisation there has been a 20 per cent reduction in cash in the economy. The ES 2016-17 showed that currency in circulation contracted by 19.7 per cent, whereas reserve money contracted by 12.9 per cent. But the recent RBI report says that cash flow has increased more than the pre-note-ban level. It also says that actual currency circulation is more than it was in 2016.

A major aspect of the demonetisation has never been taken into account. In countries like Indonesia, the Indian rupee was freely convertible. It is so even now. But the agents pay about Indonesian rupiah 170 to a rupee against the official value of rupiah 200. They tell visitors that they do not trust the Indian system as also they have to recover huge losses because the currency they had was not exchanged.

 

The note-ban also has huge economic and financial costs. The currency notes that were rendered illegal caused miseries to crores of people for standing in queues for days, hitting the poorest, the middle class, farmers, rural people the most. Millions lost wages and suffered in myriad ways.

 

A World Bank study by Robert Beyer and others of the South Asia office in different types of districts found that demonetisation’s impact was biggest in rural districts with lower banking access and hit informal workers more. These districts grew at a significantly slower rate in the quarter after demonetisation and, while the shock was only temporary, the short-term local impact was severe.

 

It had a huge cost on the RBI, the banking system, security, policing, law and order and other paraphernalia in collection of disused currency, stacking, transporting, counting at banks, recounting at RBI, scrapping and huge overtime payments to bank staff.

 

The RBI has declined to reveal the cost incurred on shredding banned currency notes worth Rs 15,31,073 crore (of Rs 15,41,793 crore), or 99.3 per cent, which returned to banks following demonetisation, an RTI activist said, citing a response from the Central bank, according to an agency report.

 

The RBI says the process of destruction of banned notes through currency verification machines got over in March 2018 and that invalidated notes worth Rs 10,720 crore did not return to the banks. So what is the cost to the exchequer? Even in a modest way it would be not be less than the cost of printing new notes.

 

According to RBI annual report, it incurred a total expenditure of Rs 7,965 crore on printing currency notes in 2016-17, which is more than double the Rs 3,420 crore spent in 2015-16 and almost 2.6 times of Rs 2770 crore spent in 2014-15. The rise in cost of printing could be attributed to printing of new currency notes.

 

This means at least another Rs 8,000 crore was spent on collection and scrapping invalidated currency. The transportation, often airlifting to meet the shortage and counting at banks and recounting at RBI, recalibration of ATMs increased the costs. Even a modest calculation would put it at not less than Rs 4,000 crore.

 

The system apparently has lost over Rs 20,000 crore in printing new notes and scrapping the old ones alone. The Government itself got lesser from the RBI, which paid Rs 30,659 crore as dividend for the year ended June 2017. It is less than half of what it gave a year ago at Rs 65,876 crore. In 2018, it is to be Rs 50,000 crore.

 

The raid raj increased by 158 per cent from 447 to 1152 groups and seizures rose by 106 per cent from Rs 712 crore to Rs 1469 crore. Taken together, the costs of demonetisation seem to outweigh the benefits. --- INFA

 

 

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