Millennium Post

Further despair for economy

In an interesting observation against government’s demonetisation initiative, the Supreme Court on Thursday said that some are facing extreme hardship while others look unaffected. In light of the vast amount of new currency notes confiscated during Income Tax raids in the past few days, the court asked the Centre as to how some people were receiving lakhs of rupees in the new currency, while the common man had to stand in serpentine queues to withdraw Rs 24,000 per week. Replying to the court, the Attorney General Mukul Rohatgi said that some bank managers are allegedly involved in illegal activities, and the government is acting against the culprits. The quandary the Centre finds itself in is best explained by Professor Arun Kumar, an eminent economist, who doggedly pursued the subject of black money long before it became part of the current public discourse. In a column for an Indian news website, Professor Kumar writes: “This revelation suggests massive corruption in the banking system and that is leading to anger. While people wait in queues and still do not get the cash they need - for just running their households or for an emergency or a wedding - the corrupt are converting their stashes of old notes into new ones. The new spin is that demonetisation is only the first of many steps to curb the black economy and that the new Rs 2,000 notes will soon be withdrawn. But why mix up so many things? Demonetisation is having a disastrous impact on the economy, especially the poor. So, tackling this should be the priority, lest the economy slips into a recession. The nation faces a very complex situation. Why add further complications by diverting attention to a ‘less cash economy’ or raids, et cetera? All these measures require a lot of preparation and could be carried out independent of demonetisation and even if they yield results that cannot be a yardstick of the success of demonetisation.”

It has become imperative for the government to spell out the exact calculations that went into its demonetisation initiative, considering how in the month since the goal posts have been shifted several times. After sucking out 86 per cent of the currency, the government has failed to ensure adequate circulation of cash. In response to growing discontentment over the initiative, the Modi government has rapidly shifted the goal posts on the demonetisation discourse, from tackling the scourge of black money to battling terror to fostering a cashless economy. Going by media reports, the narrative now is all about going cashless, while the fight against black money has seemingly receded into the background. Even if tax authorities are now able to trace the transactions and tax black money hoarders since all that money has entered the formal banking system, do our institutions have the basic architecture and human resources in place to suddenly audit crores of cases, even with computerisation? Even in a country where merely 4 per cent of the population filed income tax returns in 2014-15, the task of scrutinising accounts is a mammoth task. What could further hinder the government’s efforts is the shortage of human resources. The report goes on to state that the income tax department has a sanctioned strength of 72,000 and a 30 per cent vacancy at the moment. Will the IT department be able to handle the entire workload that comes with it? Some experts contend that the government will not be able to track them all.

What’s worse, our banks are struggling to cope with the virus of bad loans, which has choked up the entire financial system and the demonetisation exercise has stretched its capabilities beyond current capacity. Banks have been forced to divert attention and critical resources from tackling the bad loan problem to managing the cash flowing in with one wave of deposits after another. Lending has taken a serious hit, further undermining any prospective growth. Loan growth plunged by Rs 1 lakh crore in the fortnight that ended November 25, according to estimates, reported the Indian Express. As per recent RBI data collected by the Indian daily, credit or loan growth for the fortnight that ended November 25 declined to 6.6 per cent from 7.9 per cent on a year-on-year basis in the previous fortnight.
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