(27-10-17) : In a few days from now, we will be one year past November 8, 2016. That day at 8 PM, Prime Minister announced that high denomination currency notes of Rs 500/- and Rs 1000/- will not be legal tender from midnight of that day. People got time till 31 December, 2016, to exchange the demonetised notes they had. There were restrictions on bank and ATM withdrawals. The immediate consequence was currency rationing and there were long queues before ATMs and bank branches. It was widely believed that this measure would bring out the stashed away undisclosed or black money and cleanse the system. It was told by policy makers at the highest level that this was the last queue and would facilitate ending any further need to stand in queues as scarcity would be a thing of the past. Emotions were aroused against the evils of black money and tax evasion.

Normally, it would be the dissenters in a political system who would engage in such a talk. Here, the policy makers of the state started this and did it stridently. People standing in queues were asked to remember that they were doing a duty towards the nation for eradicating the evil of black money and counterfeit currency. Later, cashless economy amended further as less cash economy was also stated as another important aim.

The hypothesis behind the monetary vacuum cleaning was that the undisclosed currency stashed away by the tax evaders would be extinguished as fear ofdetection and penal consequences would deter them from bringing the same into the banking system.

What makes an analysis difficult is that the aim/s also became ambiguous with shifting signals from the policy makers. With all these varying stances, the initial claim was that demonetisation is a strategic attack on the huge stock of black money held by certain persons within the country. It came quickly after the closing of the Income Disclosure Scheme (IDS) on September 30, 2016. The Scheme bagged a disclosure of Rs 65000 crore which is minuscule, if we go by some estimates of black money in circulation. The World Bank Study (Schneider et al) on size of Shadow Economy in 162 countries, estimates the same at 22 percent of GDP for India. When translated in present monetary terms, it works out to around 25 lakh crore. Another study by economist Prof Arun Kumar, who has done substantial work in this area, the size of undisclosed economy in India is 62 of GDP. The last published official study by the Government of India, done by National Institute of Public Finance and a Policy was in 1985 and it estimated the size of black economy at 21 percent of GDP. The share has remained almost same according to the NIPFP study in 1983-85 and the World Bank Study In 2010, but the absolute amount of incomes on which taxes have been evaded has substantially increased as GDP has grown during this period. The disclosure schemes to bring in tax evaded incomes abroad yielded only around 3000 crore. The Pradhan Mantri Garib Kalyan Yojana (PMGKY), announced after demonetisation has also not yielded much. In short, the repetitive disclosure schemes have failed to unearth even a small fraction of undisclosed assets. The question that is to be addressed is whether demonetisation has succeeded where the disclosure schemes have failed.

The value of cash take out of the system by withdrawal of high denomination notes on November 8,2016, was around Rs 14 lakh crore. It was no body’s argument that the entire amount was undisclosed. Though not officially stated, hints given by policy makers gave the unambiguous impression that around Rs 3 lakh crore of undisclosed cash would be extinguished by not returning to the system due to fear of consequences. RBI’s official statistics disclosed that 99 percent of Rs 1000/- notes have come back to the banking system. It cannot be very different for Rs 500/-notes also, though the data have not been made available. It is clear that almost the entire demonetised currency has come back to the banking system and the perceived fear of detection has not acted as a deterrent. Undeterred by this, the official argument is that a good part of the cash which came into the banking system is undisclosed and government is in the process of detecting it.

The amounts deposited by shell companies is around Rs 5500 crore. Even if the entire amount is assessed and tax collected at the end of long proceedings, the amount collected is no way near the expectations that was sought to be aroused. In short, it needs to be inferred that the fundamental assumptions while making the results/expected from demonetisation was wrong. They are:

1. Undisclosed wealth is held as liquid cash by the tax evaders. Tax evader weighs the risk of detection and what could be earned from tax evaded income and is highly unlikely to hold the asset as unproductive cash earning nothing, The undisclosed income generated is flowing and gets converted into other assets and cash is only a minor part of it. Of course, the stock of assets held at a particular point can be cash, but this will be short run.

2. Cash is also held by persons who are poor and not included in the financial system. It is well recognised that financial inclusion in our country is not high.

3. The rich tax evader has laundered the undisclosed cash through banking system, by making use of other multiple accounts. Instead of a knee jerk demonetisation, more effective anti evasion measures would have been

1.Encouraging use of non cash by ensuring more infrastructural facilities for digital transactions.

2. Strengthening the information gathering mechanisms of tax authorities and having an efficient mechanism of sharing it.

3. Making update fair market valuations of land and publishing them at the national level  making unaccounted real estate transactions difficult.

4. Tackling corruption through transparency and effective check mechanisms. Even after three and a half years in power, Lok Pal has not been constituted. But these are measures which need thought and planning and will not bring in momentary publicity. Demonetisation has been politically rewarding as the ruling establishment has effectively taken the role of a protestor and dissenter, which is the natural domain of opposition and civil society groups. The movements from that of Jayaprakash Narayan to Anna Hazare built a tempo of anti incumbency by putting the then governments on the defensive. Here, the leaders in power have appropriated the space of protest and created a pro incumbency feeling, that they are here to cleanse the system of the evil of black money. Those who point out the adverse economic impact of demonetisation are painted as persons with vested interest to make black economy exist. The binary that is created in the public domain is those in favour of  and those against black money. The actual situation needs a far more wider analysis. The expectations that future gain will outweigh the present pain has to be kept up by ruling establishment if this propaganda is to retain its momentum. How long this patience would last is the question.