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With the government expected to get almost entire Rs.14 lakh crore demonetised currency back into the system by December 30 deadline, economists are now questioning the benefits of the demonetisation exercise.
Around Rs.11.55 lakh crore has come back to the banks, Reserve Bank of India (RBI) Governor Urjit Patel said on Wednesday.
The government expects the entire money in circulation to come to banks. Around Rs.14 lakh crore, that is 86 per cent of India's currency in circulation, went out of circulation on November 8 after the government announced the decision to withdraw all the high denomination currency to curb black money.
The expectation was around Rs.3.5 lakh crore worth of currency, seen as black cash, would not return to the system. The RBI was likely to transfer it to the government as dividends which could be used for creating infrastructure and increasing employment. But now with all the cash expected to come back to the system, the economists say that the prospects of any windfall accruing to the government have been lost.
“It's highly unlikely that the government will get any windfall gains it has been expecting to corner,” says Prof. Pronab Sen, former advisor, Planning Commission, adding that all the money which has come to the banks will have a name associated with it. “It's now up to the government to make use of the information,” he says.
“The cost of the demonetisation will be higher than the benefit,” says Prof. Arun Kumar, former economics professor, Jawaharlal Nehru University. “The purpose of demonetisation has not been achieved as those who have black cash have been able to convert it into white. And the government doesn't have the machinery to go after millions of Jan Dhan account holders,” he says, adding that the demonetisation exercise is very costly and the government should reverse it till the required number of notes are printed.
“As the black money has become white, the government can get so much from the tax,” says Bimal Jalan, former RBI Governor.
The questions are being raised about the cost and the benefit of the demonetisation exercise.
Economic forecasting agency, Centre for Monitoring Indian Economy (CMIE) has pegged the cost of demonetisation at Rs.1.28 lakh crore which includes the cost of printing new currency notes to the government, RBI, banks and loss of business and cost to household.
The cost, however, is much higher than this, says Prof. Kumar. “Other than the direct cost, there is an indirect cost. That will be the recession,” he adds.
Now the onus would be on the government to prove that the demonetisation was fruitful . Therefore, it might come up with stiff penalties against unaccounted money holders.
According to Revenue Secretary Adhia, “the entire in circulation has to come back to the banking channel so that we can trace the transactions who do they belong to and has tax been paid on it.”
However, the repercussions for the government may be quite high. “If the tax authorities would be brutal, it could lead to severe a backlash,” warns Prof Sen.
Though the money has come to the banks and the government knows who has how much, untangling it back will be difficult given that somebody has put money in someone else's account, say experts.
While the government says it will take action against black money hoarders, policy watchers say it would be beyond the capability of the government to track millions of accounts given the size of the Income Tax department's machinery. Now all eyes are on the government how it catches black money hoarders.
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