In a Facebook post on Sunday, Union Finance Minister Arun Jaitley looked back at the two months since Prime Minister Narendra Modi announced his government’s demonetisation drive. As argued in these columns, the currency exchange move shook the very foundations of this country, invalidating 86 per cent of the currency in circulation. In a pattern often noticed with the current Central government, there has been little attempt to delve into specifics. Even though our esteemed Finance Minister had two months to firm up the evidence for demonetisation, there was yet again nothing specific in his analysis. This editorial will seek to analyse a few of these assertions.
Short on specifics
“The Prime Minister’s decision is intended to create a new ‘normal’. It seeks to change the expenditure pattern of India and Indians. It is obviously disruptive. All reforms are disruptive. They change the retrograde status quo. The demonetisation puts a premium on honesty and penalises dishonest conduct,” Jaitley writes. Before this fantastical claim, our Finance Minister asserts how few Indians filed returns and paid tax on their incomes. If the entire exercise seeks to make citizens more honest in their dealings, one can expect the number of Indians paying income tax to rise significantly. Like many economists, cutting across political affiliations, have argued there are less disruptive ways to increase the size of India’s tax net. Another claim made by our Finance Minister is that one cannot declare the demonetisation drive to be a failure merely because nearly all or most high-value notes have been deposited in banks. “Black money does not change its colour merely because it is deposited in the bank. On the contrary, it loses its anonymity and can now be identified with its owner. The Revenue Department would thus be entitled to tax this money,” claims Jaitley.
Any attempt to measure the success or failure of this drive will be calculated by the tax revenue earned through this drive compared to the actual cost of demonetisation. Any modicum of success will entail a significantly higher amount of tax revenue over the crippling costs and lost business activity. The government has issued no White Paper on this entire exercise. Another baffling assertion made in the post is the apparent restoration of economic activity and the availability of cheap credit. Although interest rates have come down in recent weeks, it is hard to say whether it will be worth anything considering the deleterious effects of demonetisation on consumer demand. Data presented by the Central bank for the month of December suggest that growth of bank credit fell to a multi-decade low as drying up of demand in the last two months of the year saw businesses cutting down on borrowing.