Black money antidote stifles economy

The diagnosis was correct: Black money has been Indian society and business's bane. The prescription wasn't wrong: Replacement of high-value currencies to shut out hoarding black money in cash. It's the administering of the pill that seems to have gone wrong, maybe very wrong.

Designed to cleanse the system of tainted cash, the November 8 demonetisation is beginning to hurt income, demand and jobs, raising fears that the gains of uncovering corruption will be far outweighed by losses to business and economy.

A month into the scheme, 77% of the cash withdrawn (Rs11.5 lakh crore out of Rs 14.9 lakh crore pumped out in old Rs 500 and Rs 1,000 notes) has found its way back into the banking network in the form of deposits. Sure, this is a welcome conversion of some black money into white, on which some depositors will have to pay tax. But this is too minuscule a gain to justify the virtual standstill that the scheme has brought the economy to (see graphic).

“If a significant portion of the money comes back into the system, say more than 90%, then the assumption that demonetisation would reduce black money would be questionable. That would show that the black economy can be in different forms other than cash,“ says N R Bhanumurthy, professor at the National Institute of Public Finance and Policy.



As TOI reported in the past three weeks, businesses small (such as Agra's lock manufacturers and leather industry) to big (automobile, mobile and grocery) are grappling with falling sales, temporary layoffs and shaken business confi denceThe Centre for Monitoring Indian Economy has estimated the total 50-day cost of demonetisation at Rs 1.28 lakh crore, nearly 40% of annual I-T revenues.Most rating agencies and RBI have scaled back growth estimates for 2016-17.

The change in the government's stated key objectives -demonetisation as a means of stamping out black money and fake currency, increasing non-cash transactions and introduction of an unplanned tax amnesty scheme -shows that outcomes haven't matched expectations.

With the consequences now clear, what can the government do to limit the negative impact in the medium and long terms? “The jury is still out on the net benefits of demonetisation.While the pain is frontloaded, the gains will materialise over time and for that the cash shortage needs to be resolved quickly,“ says D K Joshi, chief economist at Crisil. He recommends a reduction in direct taxes and quick implementation of GST. Bhanumurthy doesn't rule out the chances of a jump in the number of I-T payers and tax revenues.

Luckily, the government can still count on popular support for the scheme, as several surveys show. But this support rides on expectations of future gains -a future not too distant.