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A Big Bang Structural Reform

Author: Sanju Verma
Publication: Pioneeredge.in
Date: September 3, 2018
URL:      http://www.pioneeredge.in/a-big-bang-structural-reform/

Demonetisation will always remain the black swan event that showcased to the world why clean governance is all about right attitude and right mindset

Recently, just about everyone from the Opposition, including those from the Congress, decided to take the high moral ground and pronounce a warped judgement, saying demonetisation was a failure. Facts, on the contrary, prove that demonetisation has been a resounding success in every sense of the word.

True, 99.3 per cent of Rs 15.41 lakh crore that was demonetised, found its way back into the banking system but what most critics forget is that not all of Rs 15.31 lakh crore that came back to banks was duly accounted for. Finance Ministry data revealed that individuals and entities, who deposited a total of more than two lakh crore rupees in cash during demonetisation, never ever filed income tax returns. Of a total of almost 22.22 lakh tax evaders, 21.12 lakh were individuals, 11,579 were companies, and the rest consisted firms (57,693), trusts, associates of person, Hindu undivided family, and artificial judicial persons.

The Central Board Of Direct Taxes (CBDT) and the Financial Intelligence Unit (FIU) have identified two sets of people and entities. In the first set, they identified people, who made cumulative cash deposits between two lakh rupees to Rs 80 lakh during the first 50 days of demonetisation, in which, a total of Rs 5.4 lakh crore of cash was deposited via 99.40 lakh transactions. In the second set, the super-rich made cash deposits more than Rs 80 lakh via 1.41 lakh transactions.

The biggest success of demonetisation, therefore, is the fact that anywhere between two crore rupees and Rs 5.4 lakh crore, that was outside the ambit of the tax net and largely unaccounted for, is now a part of the formal banking system. In other words, GDP between 1.3 per cent and 3.6 per cent, that was outside the formal banking channels, is now very much a part of the formal taxation process.

Also, assuming that the informal economy at 20 per cent of GDP and assuming that the formal sector is taxed at an average rate ranging between 15 to 20 per cent, with demonetisation, once the informal and formal merge completely, the boost to GDP on this count alone could be between three to four per cent. Ignorant Left-wing journalists, whose credibility has been eroded and a decrepit Opposition that has been routed by the virtually invincible Narendra Modi-Amit Shah duo, have been left red-faced with the first quarter GDP growth for fiscal 2018-19 coming in at a spectacular 8.2 per cent, with India all set to beat the UK and become the world’s fifth largest economy overtaking France to become the sixth largest.

More than 77 lakh new retail portfolios were added to the mutual fund industry, largely from tier-II towns, in the 2016-17, versus a little over 35 lakh portfolios that were added in 2015-16. Again, in fiscal 2017-18, more than one crore new folios were added, with the average monthly inflows into systematic investment plans of equity mutual funds being anywhere between Rs 7,000-8000 crore, versus an average of Rs 4,000-6000 crore in the pre-demonetisation period. Also, the fact that more than 2.1 lakh shell companies and more than three lakh directors had their bank accounts frozen and names disqualified from the Registrar of Companies list, is a glowing testimony to the clampdown on black money and illicit funding that demonetisation has dealt a body-blow to.

The recurring question is, whether demonetisation indeed helped in unearthing massive amounts of black money. Yes, it unarguably did, despite all arguments. For example, more than Rs 80,000 crore unaccounted wealth found its way into dormant Jan Dhan bank accounts; Rs 10,700 crore cash went into dormant bank accounts in north-eastern States and another Rs 16,000 crore worth of cash found its way into regional rural banks. Also, prior period loans amounting to Rs 80,000 crore, which was lying unpaid till November 8, 2016, were repaid by borrowers in cash, post demonetisation.

Over Rs 1.44 lakh crore unaccounted wealth in the last four years, of which, more than Rs 66,000 crore under the Income Disclosure Scheme, Rs 53,000 crore as the amount that was evaded via indirect taxes and another Rs 25,000 crore plus as undisclosed income, including money laundered into foreign banks, is currently under scrutiny by the tax department.

Moving to the superior tax compliance that demonetisation unleashed, it is pertinent to note that immediately within the first four months following demonetisation, 56 lakh new income tax assessees were added to the income tax base in fiscal 2016-17. The growth in new income taxpayers in any given fiscal year during the Congress-led UPA regime was barely seven to nine per cent. Post-demonetisation, the growth in new tax returns filed has risen by 85.51 lakh and 1.07 crore.

Over 5.29 crore income tax returns have been filed in the current FY 2018-19, with over 22 lakh returns filed on August 31, 2018 alone. More than the visible tangible benefits, it the sheer fear of the law that demonetisation has ushered in, which will always stand the test of time. Therefore, the number of income tax returns filed has risen from 3.8 crore in fiscal 2013-14, to 6.86 crore in fiscal 2017-18. The overall income tax revenues rose from Rs 6.38 lakh crore to a whopping Rs 10.02 lakh crore in the said period.

In a country like India, where even today well below 10 per cent of the population pays any meaningful income tax, every rupee saved by the Government is akin to a rupee earned. That being so, demonetisation coupled with Aadhaar has helped unearth 3.5 crore fake LPG connections, 2.95 crore duplicate ration cards, 93 lakh fake MNREGA accounts, 11.4 lakh fake pan cards, 4.4 lakh fake ghost accounts under the mid-day meal scheme, among others.

Digital transactions received a phenomenal boost post-demonetisation. Pre-demonetisation, transactions via Unified Payments Interface, on an average, stood at just one lakh a month. Post-demonetisation, that figure has risen to as high as 25 crore transactions per month. Again, pre-demonetisation, credit card and debit card transactions via point of sale terminals, on an average, stood at 70 million transactions per month. That figure, post-demonetisation, stands at a robust 400 million plus transactions per month. It is important to note here that while it took almost 70 years for India to reach 70 million digital transactions per month, it took less than 18 months for the country to reach an average monthly  size of 400 million transactions.

Beyond digitisation, demonetisation led to an almost 100-150 basis point fall in marginal cost of lending for most banks, from nine to 9.5per cent, to barely eight per cent, which in turn, benefited the Indian middle-class by way of lower EMIs. Interestingly, beyond numbers and hard data, demonetisation has been hailed by umpteen global research groups for not only curbing Naxalism in a big way but also curtailing human trafficking in large parts of Assam, Meghalaya, Manipur and Siliguri and the neighbouring countries like Nepal and Bangladesh.

Demonetisation is a big bang structural reform and the biggest game-changer in India’s post-Independent history wherein Prime Minister Narendra Modi decided that good politics is eventually about good economics.

Measures like the rupees seven lakh crore fiscal stimulus package involving building of 84,000 kilometres of roads and highways as part of the Bharatmala Project and Rs 2.11 lakh crore bank recapitalisation programme announced last year which have been hailed by global bodies and regulators, the non-performing asset (NPA) clean-up exercise under the Insolvency and Bankruptcy Code and the new law via Fugitive Economic Offenders Ordinance, are measures that will put India onto a 10 per cent plus GDP growth trajectory.

The recently released IMF report is perhaps the biggest and best endorsement of Modinomics that has been applauded not only for the stellar pace of reforms but for macroeconomic stability, low inflation, and fiscal discipline, notwithstanding rising global protectionism and elevated crude oil prices. Indeed, Modinomics is an idea that is here to stay and demonetisation will always remain as the “black swan” event that showcased to the world why clean governance is all about right attitude and right mindset.

- (The writer is an economist and chief spokesperson for BJP, Mumbai)
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