Source –Business Line

Date of Publication-Wednesday 8 November 2017

Note – Many students are making project on demonetization The below article which has been taken from business line shows the positive view of demonetization

It can be a great help to students who are preparing for project and also for group discussion in various entrance examination

Topic Demonetization

Adapted from - It’s a major structural change

Author – Arun Jaitley – Finance Minister

Synopsis – Finance Minister believes that the initiative has also introduced a higher degree of ethics in Indian society

Q1 India is a cash dominated economy What does it mean

Answer 1 India is one of the few economies in the world which has been excessively cash-dominated. A cash-dominated economy has several features, the most obvious being that the percentage of cash currency in circulation in relation to GDP is very high. In India, it was between 12 and 12.5 per cent; 86 per cent of this currency was high denominational — Rs 500 and Rs 1000.

Q2 What is the effect of cash economy in our country in terms of economics?

Answer 2 It would also lead to economic activity. But this informal economic activity would be outside the formal order. The net result has been that the size of the formal economy contracted and that of the shadow economy became much larger

Q3 What is social impact of cash economy

Answer 3 Social impact

Cash also has social consequences. It leads to corruption. The instrument of bribery is always cash. Cash leads to expenditure on conspicuous items like gold and luxury items. Cash is also the instrument for fuelling crime, extortion. Terrorism thrives on cash. And, therefore, in the larger national and public interest as also for good economic reasons, the quantum of cash in the society and the economy has to be curbed.

Q4 What steps government has taken earlier to curb the black money previously

Answer 4 a) In 2011, the Supreme Court had asked the Government to appoint a Special Investigation Team (SIT) headed by two retired judges.

b) A scheme was introduced that those who have illegal money and assets abroad must bring them back on payment of 60 per cent tax and penalty or they will be prosecuted. The Black Money Law for overseas assets was enacted and it provided for a 10-year punishment.

c) The government started entering into agreements with countries across the world through G20, the FATCA agreement with the US to improve international tax compliance through mutual assistance in tax matters, agreement with Switzerland so that we can get real-time information with regard to transactions done by Indians overseas and vice-versa. Three major international double tax avoidance treaties with Mauritius, Cyprus and Singapore have been rewritten.

d) The government then brought in the Benami law which brings into its ambit businessmen and politicians alike and applies to shell companies through which money is laundered. We brought in the income disclosure scheme to disclose income which has escaped assessment.

e) Finally, on November 8, 2016, the Government took the historic decision of demonetising the Rs 500 and Rs 1000 notes.

Q6 What were the objectives and achievement of demonetization

Answer6 a) The first, of course, was that the quantum of cash should be curbed.

b) The number of individuals paying tax and filing assessments has significantly increased

c) An incidental advantage that we have seen is that freezing of funds of terrorists operating in Jammu and Kashmir and Chhattisgarh has taken place. The nature of protests there which depended on large economic resources has altered.

d) A currency note is a bearer document. Its ownership is anonymous. The moment it gets deposited in the bank account, it gets identified with the owner. The onus is now on the owner to show that the acquisition of such a large amount of money was legitimate or otherwise. And under Operation Clean Money, we have been able to identify through data mining 1.8 million people who made deposits disproportionate to their known sources of income.

Questions for Viva for the students who are making project on demonetization

Has the use of cash come down post demonetisation?

The currency with the public is down by Rs. 3 lakh crore. The positive spin is that Indians are getting out of the cash habit and are moving to non-cash payment. The negative spin is that the reason the cash has not come back is that the cash economy is in such bad shape that they can’t absorb that money.

What has happened to black money?

There is total confusion. Black money is not kept under the pillow or in bank lockers. It is almost always put to some use. It is either used to buy valuables like real estate and gold or is anonymously invested in stocks or sent abroad. A bulk of it goes into financing the informal sector. All this is black money because it is not taxed. All this came back into the banking system and all of it except Rs. 3 lakh crore has again been withdrawn. GST will make a lot of impact on black money as it will help generate a paper trail.

One year later, what has been the impact of the note-ban on the economy?

Agriculture has suffered quite significantly and, in effect, there have now been three successive years of agriculture distress — two because of droughts and one because of demonetisation. Last year’s kharif crops were partially compensated and were reasonable but the full impact of demonetisation was on this year’s rabi crop. There has also been slackening of demand for corporate India.

The rupee appreciated significantly and imports shot up. So domestic companies have been unable to expand their exports and are having a hard time maintaining their market share in India through import competition.

Are there chances of a revival in the economy from the second quarter?

I think the entire year is going to be bad. In the second quarter, there will be two conflicting influences operating. The positive effect will be that the de-stocking before GST will be reversed.

The negative effect is that supply chain problems arising out of GST will start playing out. But, from the third quarter, we will only be left with the GST effect, which will be negative.

The impact of demonetisation on demand will also continue until the rural sector picks up. We have to carefully watch what’s happening at the mandi level to the kharif crop which comes in now. If there is another price crash, we are in deep trouble.

It’s a year since the government opted for demonetisation. Do you still believe it was a right decision, given its impact on the GDP?

I still stand by my views on demonetisation. It is a decisive attack on the whole culture of black money. You can say it is draining the swamp. Yes, there has been an impact on GDP. But a major decision like this comes at a cost. The process of changing the culture of illegality is slow but it is happening. It is wrong to say that all blackmoney has turned into white. It has turned grey. The dubious money is now sitting in bank accounts that are under scrutiny. See for example the changing process in defence and real estate. Yes, economic activities were impacted by this. But this was because the economy was readjusting itself to the changed structure. Today dishonesty is not incentivised.

But how do you assess the success of demonetisation, considering the RBI is still counting the currency?

This is a constant question. How much has come in? Why don’t you see it like this — there are 18 lakh accounts, of which 13 lakh accounts have been identified and are under scanner, about 4,000 accounts have already been acted against by the government. These have yielded ₹5,000 crore. The whole process has sent a strong signal to all that there is no scope for such activity.

Some critics say — won’t dumping the currency have sent a stronger message...

If the government had instructed something like this it would have created a ripple (smiles), created a thrill, but would not have achieved the desired impact. Things have to be done step-by-step.

Debate has also taken place on the frequency of demonetization and whether the government should do away with high-denomination notes (₹2,000). As an economist what will you propose?

Not demonetisation, but currency replacement can happen if, say, the government wants to shift to all-plastic instead of paper, or to make certain changes in a particular denomination. As regards the higher denomination currency, I would think a better idea is to do how it is done in the developed world — link it to per capita income. In the US, the highest denomination is $100 when the per capita income is nearly $40,000. We have to similarly calibrate our currency.

Hasn’t GST impacted the consumption pattern?

We have to see everything in a perspective. See what kind of economy we want. Do you want to be Japan or you want to be Brazil? India should target Japan, where the set-up is aimed at larger growth of the middle-class. The Japanese society has far less inequality and yet prosperity for the middle-class.

GST has impacted the consumption demand, but of luxury items, not rural consumption.

The rural economy has not been impacted because agriculture has been out of income-tax net. Success will come about if this move leads to replacing consumption demand with investment demand.

To clean up the economy there have to be major reforms in the taxation structure. The government has taken a major initiative in indirect tax reforms (GST). What about direct taxes?

Yes, I agree. But credit to this government that it has taken the initiative of cleansing a termite-ridden system that was never touched by successive governments earlier. Today, the tax system is far more transparent.

For direct tax also there is everything online just as is the case with indirect tax now. More will happen.

How to move to a cash less economy

Despite the push to cashless transactions through a variety of digital payment options, Indians seem to be going back to using cash a year after demonetisation. A recent study by MicroSave tracks the efforts to promote a less cash society by public sector banks and the National Payments Corporation of India.

Key Steps: “The task of building a less cash eco-system is colossal but not impossible,” according to the study.

Identify and on-board merchants: Merchants become critical in promoting a less cash ecosystem, especially in rural India.

Installing acceptance infrastructure: Once merchants have been on-boarded, banks must provide appropriate acceptance infrastructure at their shops. Options can include economical and compact card swiping m-PoS terminals or platforms such as BHIM Aadhaar Pay, Bharat QR Code

Train merchants to facilitate digital payments: Merchants must be trained in conducting digital transactions, and in turn they can train customers, especially in rural areas.

Customer education: Mass media platforms, financial literacy campaigns, live, hands-on training on digital transactions and create “product champions” at the village level to promote a steady uptake of digital payments.