Do not forget the pain and anguish of demonetisation

Demonetisation was not expected to bring roses merely by sweepstake to promote digital payments, interest subsidy on home loans or maternity benefits, neither was it another populist plot that could be left halfway without tangibles.

However, after 50 days of India’s most painful economic reset, Prime Minister Narendra Modi made us realise that former US president Ronald Reagan was right when he famously quipped that the government doesn’t solve the problems; it only subsidises them.

Even after 50 excruciating days of the "surgical strike" against black money, the government preferred to stay ambivalent on the results of note ban drive.

Even as the ruinous aftermath of notebandi is visible in key economic numbers, the RBI behaves mysteriously numb when it comes to updating bank deposit data. The government too is not only unsure about the haul of black money but also tentative about the next course of the war on it.   

Whatever the political design may be, citizens must not forget the pain of demonetisation which they endured in exchange for a clean economic and political system.

As Modi himself said that demonetisation is just the beginning of the war against black money, the nation logically expects follow-up measures to test his resolve on quashing the parallel economy, before the aroma of "shudhi yagna" dissolves in the air.   

Kings of cash

Soon after demonetisation, income tax officials realised that a huge chunk of black money was being whitewashed through channels allowed for unlimited cash transactions and holding. Corporate and trade operations, government treasuries, political parties, finance companies, religious organisations and trusts are free to play in cash without any ceiling.

There has never been any limit on keeping cash for the above-mentioned institutions. In fact, the absence of cash-holding and transaction limits has come up as one of the key reasons behind the breakdown of the demonetisation exercise. 

As far as individual taxpayers are concerned, they are also not supposed to declare cash and gold holdings as part of their annual income tax return, as long as the tax department does not investigate their unaccounted income.

Much before the noteban, the Supreme Court’s SIT on black money had suggested banning cash transactions above Rs 3 lakh and capping the cash-holding of an industry or individual at Rs 15 lakh.

Will the government bite this bullet in the coming Union Budget and limit cash-holdings more at the corporate and institutional level as a logical upshot to demonetisation?  

Who is buying gold and land?

To check the black money going into physical assets, it is essential to verify the identity of the buyers and sellers of gold and property. Quoting of PAN is compulsory in high-value transactions. However, huge gold, jewellery and land deals take place without PAN or identification because there are only 23 crore PAN card holders in India and barely 16 per cent of them or 3.5 crore people file tax returns.

This is the reason why people rushed towards gold and invested heavily in land, especially agricultural land, after demonetisation.

The government will have to make KYC compulsory for buying of physical assets sooner than later to prevent the new cash going back into purchase of land and the yellow metal.

Labyrinth of business accounts

There are far more legal ways of laundering black money than illegal ones. As the white paper on black money (2012) points out: the sophistication in such approaches mostly gets introduced for the purpose of laundering money with the objective of making it accountable and converting it into legitimate wealth that can be openly possessed and used.

Out-of-book transactions, parallel accounts, manipulation of sales/receipts-capital-expenses, under-reporting of production and use of international transactions through associate enterprises are a few lawful ways evidently used in money-laundering.

Going forward, the government will have to eat humble pie by forcing rigorous business accounting reforms, especially forensic accounting, to block legal escape routes for black money.   

The great political laundry

Right at the time when the nation was expecting a genuine surgical strike on dirty political money, the PM evaded the task by a wishful narrative.

The government will face a serious dent to its credibility if the Budget fails to come up with a courageous amendment to the Income Tax Act (section 13 A) in order to seal the black hole of political donations.

Political parties are under no obligation to report contributions below Rs 20,000. Most black money travels through this hole. Between 2005 and 2013, as much as 73 per cent of Rs 5,000 crore contributions of five major political parties, including the BJP and Congress, came through unknown sources.

Public memory is notoriously short and politicians are wily enough to enjoy it. However, events like demonetisation should not be forgotten because if such enormous pain fails to deliver us basic corporate, economic and political transparency, than what else will we have to sacrifice in order to become a better nation?

Also read: Demonetisation is a success in humiliating India