Demonetisation: PM Modi Acted Without Updated Facts and Figures
NEW DELHI: The Government of India has no up-to-date official figures on the extent of black money either in India or stashed abroad. In effect, Prime Minister Narendra Modi's November 8 decision on demonetization of Rs 500 and RS 1000 rupee notes, ostensibly to curb black money significantly, is built on a surmise.There is no authoritative math done as yet to cover the period from May 2014 to the present on the issue of black money in the economy, The Modi government, it appears, is working on the presumption that a spurt in the circulation of high value notes in the economy is mainly due to increased terror- funding and slush funds, a presumption based largely on studies by other agencies.
Finance Minister Arun Jaitley admitted in Parliament as recently as July this year that there was no official estimation with the Modi government on how much black money is actually stashed abroad or at home, and that the figures that existed were all estimates by NGOs and economists .Many representatives of the government have, in the thick of the demonetisation move, referred often to a 2010 report of the World Bank on black money in the Indian economy. And a later White Paper on black money brought out in 2012 by the Finance Ministry. In July 2010, the World Bank estimated that the weighted average size of the shadow economy of India (as a percentage of the GDP) was 20.7% in 1999 and 23.2% in 2007
Niti Aayog member and economist Bibek Debroy maintained in an interview to a news channel recently that counterfeit notes in circulation in the economy__another major concern that PM Modi's demonetisation move is expected to deliver a bodyblow to, apart from unaccounted-for and untaxed money__are much higher in number than the levels estimated by the NIA in its 2015 report. Estimates on fake currency from that report were submitted by the government in court recently, after its demonetisation decision; The decision has covered a huge band width in economic disruption countrywide since November 8.
However, no specific figures elaborating economist Debroy's claims have to date surfaced in the public domain .An Indian Statistical Institute report estimated that banknotes iwth a face value of Rs 400 crore were circulated in the country at all given times, at the rate of an annual Rs 70 crore each year. Of this, close to half comprised fake Rs 1000 notes.However, law enforcement agencies found it hard even to intercept even one third of that amount. As many as 250 out of every 10 lakh notes in circulation are fake, according to that study which maintained that typically, at any point in time, banknotes with a face value of Rs 400 crore are in circulation in the economy. The study revealed that fake currency notes with a face value of Rs 70 crore were infused into the system every year.
PM Modi himself has ducked all pressure from the Opposition to make a statement in the Upper House in Parliament spelling out the math on how much of a stranglehold black money has on the economy at present and what percentage of such money in currency the government hopes to mop up through its move. The Opposition has also demanded to know, crucially, how many new notes of Rs 500 and below have so far been printed to replace the notes sucked out of the economy. The lack of conclusive updated figures on black money circulation makes claims of a worthwhile "citizen sacrifice" for the nation in terms of "short term pain for long term economic gain" patently hollow.
An SIT on black money headed by Justice MB Shah under direction of the Supreme Court was among the first decisions of the Modi government after assuming power. In July this year, in its fifth report to the SC o methods to control circulation of black money in the economy, the SIT had maintained that a large amount of untaxed wealth was lately being stored in cash. In that context, it had suggested that a penalty-loaded legal curb be put on cash transactions over Rs three lakh lakh . It had also suggested a legal curb on cash holding above Rs 15 lakh and that any transaction over Rs three lakh require special permission from authorities. The report, however, had not pointed to any categoric reason why more untaxed wealth was being held in cash of late as compared to earlier.
One indication to that, interestingly enough, came from brokerage firm Ambit Capital recently. In mid 2016, a study by the firm on black money in the overall economy pegged it at around 20 p.c of the GDP. It concluded that black money presence had, in fact, been shrinking gradually over time in the last two decades. In particular, the study credited the Modi government with taking stringent action against tax evaders on many fronts, leading to a reduction of the quotient of black money in the economy (gold, real estate, currency etc), to only 20 pc of the GDP overtime. (It was pegged at less than five pc in 1984) In effect, the Ambit study claimed that it was primarily thanks to the Modi government’s strong action against illegal wealth in the gold, education and other non currency sectors that had played a key role in forcing down the public appetite for gold and driving nervous tax evaders to park their wealth in high value currency. Given that striking conclusion, the PM’s claims attached to his demonetisation decision and the adverse impact of that on close to 86 pc of the economy that relies heavily on cash transactions (informal sector, in the main) are all the more distressing. Simply put, the government is both the disease and the cure on the issue of black money held in currency, not just the latter.
More recently, Ambit, the same firm that mid year lauded the Modi government for shrinking the shadow economy, significantly pegged down GDP growth in FY2017 from 6.8 pc to only 3.5 p,c. A sentiment echoed by former PM Manmohan Singh recently in Parliament. The nationwide cash crunch in the economy due to the demonetisation drive of the Modi regime, Ambit said, would paralyse economic activity in the short term. Recovery in the entire rural economy and a bulk of the informal sector from this unfathomably vicious and sudden electrocution could, according to economist Neelkanth Mishra, take as long as 12-15 months even as ordinary citizens are being forcibly prevented from using their own hard earned money. Thanks, it appears, to a situation on black money in currency that the PM may himself have engineered.
Finance ministry data shows that circulation of high value notes increased 40 p.c in the period between 2011 and 2016. Rs 500 notes increased 76 p.c and Rs 1000 notes increased 109 p.c. Such a spurt in increased circulation of the high value notes in the economy is also possible on account of inflation; If the government seriously analysed both possibilities at length and came to a sound conclusion before its “war on black money” decision on the currency front, it’s not been publicised for critical assessment.. An updated White Paper on this close on three years into the Modi government, in fact, would have been a vital precursor to the November 8 decision and would have gone, to some extent atleast, to explain the basic context for the government's sudden and hastily executed decision. In fact, even a detailed, statistics backed statement on this in the immediate aftermath could have worked well for the government and significantly boosted its credibility quotient, even if the basic math were sorely missing. Lies, Damn Lies and Statistics are cosy bed mates at any given time and the last lends itself very malleably to partisan parameters.The PM himself claimed that Rs 1.25 lakh crore had been mopped up in illegal funds from the economy by his government in stringent action over the last several months. But the public is yet to palpably realise the economic impact of this in its daily life.
Economist Prabhat Patnaik argues that there is no such thing as black money and in fact all money provides liquidity to the economy and is meant to earn profits and not be stashed away. In fact, "black money" refers to a whole set of activities both illegal and legal. A recent study of IT data between April 1 and October 31 by the HT pegged untaxed wealth held in cash at only five per cent , at Rs 403 crore. If one were to roughly peg that at Rs 800 crore annually and use that as a yardstick for a considered cost-benefit analysis of the PM's November 8 policy decision and its overall GDP, commercial, financial, personal, emotional, psychological and social impact, the government's claim of a massive atttack on black money held in cash becomes questionable.
That the government did not even come out with its own statement even a fortnight after November 8 but, instead, continued to amend the demonetisation decision daily and hourly in a highly ad hoc manner, reacting to criticism from the Opposition, only goes to reinforce the reading that no homework had been done on the black money assault front. And that the imminent motive and target may not have been economic but electoral and image boosting for the PM himself, the BJP’s biggest USP on the poll front so far. As things stand, the government is daily moving the goal posts on its November 8 decision.
The Modi regime seems to have conveniently forgotten its prominent poll promise of bringing back big black money stashed abroad in Swiss accounts and so on by getting around “no name fishing”.provisions. Different representatives of the ruling party and Cabinet, at different points, have suggested that one, the demonetisation decision was primarily aimed at moving towards India towards a cashless society (only around 2 pc of the economy is currently cashless, so this would mean a Himalayan challenge and a giant leap forward), two, that society would be an eminently more egalitarian one, three, the move was aimed at finishing off all corruption in the economy, four, the move was aimed at significant reduction of black money in currency and would be followed by stringent action against unaccounted wealth parked in gold, real estate and other sectors That, it seems, is a disruptive and unsettling socio-economic poll script that is still unravelling and could remain so well into the new year.
The Modi government has so far indicated that it hopes to mop up around 85 per cent of the high value currency in circulation in the economy. The rest, comprising illegal money and counterfeit notes, it is expected, will not find its way to the banks. And may, according to some reports, be entered in the RBI's books once the relevant amendment to the RBI Act is made. Thus far, also, the government has been trumpeting its premise that the recovery of growth would be demand driven but, as former Disinvestment minister Arun Shourie pointed on Thursday, this inexplicable (at least on the economic front) decision of PM Modi has put paid to that claim for the present.
It has dealt a massive body blow to the entire informal sector that relies solely on cash transactions. Add to that zooming down figures for industrial growth and jobs. The one thing the PM's move would do is to reboot the public sector banking system felled by massive NPAs from the corporate sector and , more recently, massive debit card scams. Even as rural banks and the cooperative sector flag, the government's decision has already blueprinted the road for millions of new entrants to be exposed to electronic frauds .On Sunday, PM Modi claimed in his Mann ki Baat address (not interactive) that moving towards electronic transactions on mobiles etc from currency based transaction was “very safe.” And “very beneficial” to small traders and vendors, cottage and micro scale ventures.
Economist Prabhat Patnaik argues that there is no such thing as black money and in fact all money provides liquidity to the economy and is meant to earn profits and not be stashed away. In fact, "black money" refers to a whole set of activities both illegal and legal. A recent study of IT data between April 1 and October 31 by the HT pegged untaxed wealth held in cash at only five per cent , at Rs 403 crore. If one were to use that as a yardstick for a considered cost-benefit analysis of the PM's November 8 policy decision and its overall GDP, commercial, financial, personal, emotional, psychological and social impact, the government's claim of a massive atttack on black money held in cash remains highly questionable.
And at a massive cost to the most vulnerable, marginalised and economically weak in a society already highly stressed socio-politically under this government.
(Prabha Jagannathan is a journalist)