Event Reports

Demonetisation, digitalisation, GST done without proper preparations: Expert

Demonetisation,GST
Photolabs@ORF
2017
Nov
13

One year after the demonetisation announcement by the Prime Minister, it is becoming increasingly clear that it was a political decision taken at the highest levels of the Government without accompanying ground-level preparations, according to Mr M R Venkatesh, author and economic analyst.

Initiating a discussion on ‘One year after demonetisation’ at the Chennai Chapter of Observer Research Foundation, on October 28, 2017, Mr Venkatesh said what we are seeing now is unintended mess, uncannily exploited by sections of population and corporation to defeat the very purposes for which the exercise was launched.

By standing in bank and ATM queues without a murmur of protest, 400 million people metaphorically stood by Prime Minister Narendra Modi for the bold decision, for what was said as an unprecedented effort at ending counterfeit currency and black money, as among the goals of demonetisation. The victory of the ruling BJP at the Centre in the subsequent Assembly polls in Uttar Pradesh, the largest State in the country,  was a standing proof.

However, some of the claims needed to be tested against the reality on the ground, Mr Ventatesh said. In this, he cited the delayed RBI report, which has declared that 99 per cent of the demonetised currencies had been returned to banks. This meant that either the returned currency contained large volumes of counterfeit notes, or there was not as much fake currency/black money as originally thought of and claimed, as being cross-border funds for terrorists and anti-nationals.

Black money conversion

The sting of demonetisation was lost when the scheme was introduced after the abolition of wealth tax in 2015, and yet there was no bar on anyone holding large amounts in cash. This meant that demonetisation was used to exchange black money for white, though it might still have to be accounted somewhere still.

This is because Section 68 of the Income-tax Act levies only 30 per cent tax for unexplained credit/cash, and demonetisation, unintentionally, facilitated conversion of black money into white, especially by benami firms. Thanks to demonetisation, banks too were made a party to such conversion, Mr  Venkatesh said.

He said that there was still a drop in terror-funding due to demonetisation, indicating that there was some truth in the Government’s claims. However, the question remained, if for such low results, the Government should have launched such a high-profile scheme that upset the economy of the nation and the individual alike.

Though demonetisation was introduced at the height of the sowing season, the farm sector was not affected. However, the labour-intensive real estate sector, which was already low, came to a complete standstill and is yet to recover. Banks  have stopped funding housing and boosted vehicle loans. There is turbulence in the banking sector, and the credit growth is the lowest of 20 years, standing at minus-five per cent.  This is a worrying factor, he said.

Digitalisation and GST

Combining demonetisation with digitalisation was another flaw in the scheme, according to Mr Venkatesh. Digitalising 130 crores of people was welcome, but could not be achieved overnight. But demonetisation, both in Government declarations and public perceptions, got inter-linked with digitalisation. With the result, there was added confusion, and avoidable delays.

As if this was not enough, the GST was thrown in without the required structural reforms, forcing factories to shut down and denying the competitive-edge for exports, which were again low, even otherwise. The trade-deficit was already massive and introduction of demonetisation and GST one after the other has added to the problems. Overall, there was a mis-match in demand-supply management, and it is becoming increasingly clear that serious critical analysis of the effects of the three-fold initiatives of demonetisation, digitalisation and GST, was lacking both before and after the launch of these schemes.


This report is prepared by S Sivanesan, Associate, Observer Research Foundation, Chennai