In 1946, the Britishers did a surgical strike on hoarders and black marketers of World War-II, by demonetizing high denomination notes; and made a neat pile. In 1978, Mr. Moraji Desai tried to freeze the secret funds of Mrs. Gandhi through demonetization. However, this time it was a dismal failure. Modi’s carpet bombing on 8th November, 2016 has been a real winner; as it has since netted 4 lakh crores. However, it seems to have taken the sheen out of Mr. Modi’s dynamism, as the inconvenience it is causing to the common man has been humungous. With 2 lakh ATMs largely dysfunctional, provision of a separate queue for pensioners, could not have been more oxymoronic. More importantly, India is presently witnessing a massive agrarian distress with bumper harvest; with no cash to buy. It’s like “poverty in the midst of plenty”. The ire of the Bengali babus, who normally use a 500 hundred rupee note for their quota of fish, could not have been more severe. No wonder, Mamata Di is sulking and hopping mad!
However, there are a few high points of this exercise, as the liabilities of the Reserve Bank of India would be possibly depleted by 4 lakh crores. This will be the black money which will either be incinerated or wafted into thin air! The Reserve Bank of India has the enviable advantage of providing this kitty to the Government as a dividend in April 2017. This will substantially reduce the fiscal deficit of the Government. It would also help RBI to infuse additional liquidity into the banking system with the potential of reducing the bank cost of credit. Mrs. Arundhati Bhattacharya, the SBI Chairman, has gone public on this credit bonanza. However, the information that the SBI is using this deposit windfall to favour defaulters like Vijay Mallya by writing off their bad debt cannot be more distressing. The Government must use the black money unearthed to improve its financial health and reduce cost of credit; instead of helping out known offenders of banking default.
The real estate, gold and jewellery and untaxed agricultural income are the well known beneficiaries of black money. However, what is less discussed is the role of black money in funding elections. Shri S.Y. Quraishi, the previous CEC, has gone on record that the actual spending by candidates is around 15 times the limit set by the election commission. Most of the donations by the corporates in Quarishi’s assessment is “under hand corporate funding for undue favours” from the government later on. The recent green tax waiver of Rs.300Cr. to a well known Modi acolyte is a testimony to this apprehension. Further, Mr. Satyananda Mishra, the previous Chief Information Commissioner, had issued a notice to all political parties to file their returns in a transparent manner. Most parties have evaded this notice. There is no decisive move on the part of the Government to introduce state funding of elections, unlike Australia where government funding of recognized parties has curbed the menace of underhand funding substantially. Free and fair election, which is a basic feature of democracy, gets severely compromised by crony capitalism.
While these are endogenous factors for black money circulation within the country, exogenous factors like round tripping whereby tax havens like Mauritius are used for laundering black money go scot free. It may be recalled that the Shome Committee had recommended into election of General Anti-Avoidance Rule (GAAR) to preempt misuse of Double Tax Anti Avoidance Agreements (DTAA). The Parliament must bring up such provision early so that large scale tax evasion which is around 85,000 crores a year can be avoided.
The demonetization move is a step towards to a cashless economy, on the lines of developed countries where use of cash is 3% of GDP as against 11% in India. However, we have to recognize that 50% Indians still do not have bank accounts and the rural sectors do not have a good network of ATMs and 40% of new accounts opened under the aegis of Jan Dhan scheme have zero balance. The present crisis in the rural sector is due to cashless banks and near non-existence of ATMs. While daredevilry on the part of Mr. Modi can score political points with upcoming UP elections in mind, it clearly overlooks the distressing experience of the common man and the honest citizens who queue up in interminably long queues; due to the inept implementation by the government. Secrecy can’t be a subterfuge for inefficiency. The discerning analysts believe that in the absence of effective electoral laws to curb use of black money in elections and non introduction of GAAR to check money laundering in tax havens, the so-called surgical strike is like a rat trap on the tail of the tiger of black money, and will not bring up systematic improvement in the financial health of India.