When will we admit demonetisation was horrible for India?
The Reserve Bank of India recently released India’s growth figure for the first quarter (April-June) of financial year 2017-18, and even the staunchest supporters of demonetisation couldn’t help but flinch.
As part of a generation that’s seen India grow from licence raj to internet-of-things today, I feel the need to discuss a very important economic phenomenon that took place in our country in November 2016.
Let’s address the concept of black money. It’s simply money on which you don’t pay taxes if you’re supposed to, and not money that’s not in the Indian banking system or any system for that matter.
India’s population comprises of 1.3 billion people out of which the percentage of population below the poverty line is 21 per cent (World Bank 2012 estimates), which means one automatically rules out 0.28 billion of the population earning black money.
The definition of being below poverty line is that one earns Rs 130 a day. Now even if we assume that people below the poverty line work every day and actually earn that money, they will still earn an annual income of Rs 46,800. And in India for one’s income to be taxed, one has to earn an annual income of Rs 250,000 or above. So, clearly these 0.28 billion people did not evade taxes.
According to government data, the percentage of population in the income tax bracket of 5 per cent and 20 per cent (someone earning between Rs 2.5 lakh and Rs 10 lakh) is 0.0306 billion (94 per cent of the tax-paying population) and these 0.0306 billion people's tax contribution amounts to just 24.9 per cent of total tax collected. People in the tax bracket income of above Rs 20 lakh are 0.0005 billion (1.3 per cent of the tax-paying population) and the contribution of these 0.0005 billion people towards the tax pie is 63 per cent.
To put this in simple words, the poor, the lower class and the middle class population of India comprise 94 per cent of the tax-paying population and their tax contributions matter just 24.9 per cent, whereas the rich population of India comprises 1.3 per cent of the tax population and its tax contribution matters a whole of 63 per cent towards taxes paid.
Thus, even if we make a massive assumption that workers who earn below Rs 10 lakh a year and contribute to 24 per cent of the tax revenue don’t pay taxes, we are still left with the top tax-paying community who’s contribution matters 63 per cent. This discrepancy in tax contribution puts light on exactly which community evades taxes.
Thus, to target a specific minority group in the country, the entire population was shaken; long queues that comprised the common man, daily wage earners harassed by their bosses to accept old currency notes or nothing at all, middle class families which had upcoming weddings for which they saved their hard-earned money, farmers who committed suicide due to lack of income to buy seeds, workers who did not get paid leaves to deposit their money in banks (in case they made it to the end of the line).
The government wants to create Digital India and ensure that every person has a bank account at a time when electricity is not even regular in most villages of India.
At the time of demonetisation, the central government didn’t have provisions in place to meet the liquidity demand. Patchy policy changes almost every day, inefficient credit systems in ATMs, an allowance of Rs 2.5 lakh withdrawal for families with upcoming weddings - all this sounded more like a joke.
The government wanted people to deposit money in the bank yet it wanted to decide how much of that deposited money could one withdraw. The government encouraged the use of online payment portals but charged extra for using those services forced on everyone.
The government wanted to eradicate black money from the system through demonetisation yet it failed to remember that it didn’t work in 1946 and in 1978.
The Modi government wanted to create a business-friendly environment for the top 5 per cent of the population that could actually afford to start a business (it costs a minimum of Rs 2 lakh-Rs 3 lakh to start your own company), yet it forgot about the bottom 95 per cent that paid the price in the apparent short run.
"Fifty days" could have been a short term for one who had enough to eat every day and a house to sleep in, but not for those who had to fight each day to ensure even one meal a day.
India was able to face the financial crisis of 2007 because it had strong macro-economic variables.
Strong macro-economic variables mean a strong banking sector and investments that are not volatile.
The government needs to ensure and focus on a strong banking sector, stable investments, serviced credits, monitored lending, employment generation, and skill development.
A diverse nation as India, where majority of the population still lives in rural areas, a one pill for all solution will not work. Trying to go towards a capitalist economy overnight is definitely not the way for economic development.
I’m not against a modern economic path, but the way such a massive policy change was carried out.
"Surgical strikes" are effective only if the planning and strategising parts are well thought out. One cannot ignore the plight of 95 per cent of India’s population by calling it temporary pain and expect economic growth.
Was this 95 per cent prepared to face the pain? That’s the main question.
Inclusive economic growth is the key. Smart city, Make in India, Swachh Bharat Abhiyan, Beti Padhao, Sanitation for All are great efforts to turn India into an economic magnet.
GST will strengthen the taxing system in India and prevent evasion and black money. Foreign investors are reluctant to invest in India because our tax system is complicated, bureaucracy and red-tapeism; GST will be able to solve a lot of those issues by making income earners tax compliant and increasing the tax base.
Demonetisation was definitely a blow to terror funding in the short-run but according to a study by the Financial Action Task Force, majority of terror funding takes place through counterfeit money produced through organised groups across nations, not just India.
Thus, creating replicas of the new notes won’t be a massive task for these organised groups. Then how did this move hit terrorism or black money?
Also read: King Modi botched up: How demonetisation crippled Indian economy