Deposits collected by banks of derecognized Rs 500 and 1000 are close to 12 lakh crore as of last week according to reliable information available with our channel and this figure doesn’t include monies collected by post offices and a few other outlets who are allowed to accept old notes. At this rate, the figure by December 31, may be much closer to 15 trillion, which is the total amount of Rs 500 and 1,000 notes what were in circulation as on Nov 8.
Some still hope at least Rs 1-1.5 lakh crore will not come back to the banks and hence RBI may be able to gift that amount as a dividend to government, which In turn may be used as a fiscal boost. Experts on central bank accounts are sure this won’t be possible. There are many Indians living abroad who may be carrying a few of the old Rs 500 & 1,000 notes with them; several others who may be temporarily abroad may have some cash left back at home. Some people may have simply forgotten that they had stored away cash and may chance upon it after January 1.
Legal experts say RBI is legally bound to honour these claims. Which is why the RBI’s notification and FAQs clearly state that people can exchange old notes till March 31 at various RBI offices. In fact experts say RBI is legally bound to extend this date. In fact the correct procedure ought to be to keep the unclaimed money in a special account in the liabilities side of its balance sheet and use it whenever claims come.
Short point, on February 1 when the budget is prepared, the government cannot legally claim any of the unclaimed money. Only on July 1 when the RBI prepares its balance sheet will one know how much is the unclaimed amount and how the RBI has chosen to treat it. At best the government can hope for a dividend from its current year’s surplus which may well not be as high as the Rs 65,000 crores that governor Rajan declared every year during his tenure. That’s because this year the RBI toohas spent a decent amount of cash accepting banks’ surplus in its reverse repo window and will probably have to do so for many more months in 2017. Hence any fiscal stimulus because of demonetization and an RBI largesse looks difficult.
The Prime Minister has been trying another track. Over the weekend he said he is thinking hard about how to use the cash laundered through Jan Dhan accounts to redistribute to the poor. For starters the government has already capped withdrawals from Jan Dhan accounts to Rs 10,000 a month as also the total deposit amount at Rs 50,000. This means an inconvenience of only 5 months for those who have laundered their money through Jan Dhan accounts.
In any case, a look at the PMJDY website indicates, the number is not humungous. On Nov 9, 19.88 cr of the 25.78 Jan Dhan accounts were active. The amounts in these have swelled from Rs 45,636 cr to Rs 74,322 crores. That works to just Rs 1442 per account. Even assuming this laundering is confined to 3-4 crore accounts, it doesn’t work out to a great deal of money to redistribute. Many of these may be accounts where employers have paid advance salaries for a few months.
Yes the income tax department along with banks can easily ferret out the suspicious accounts, but to follow each of them and capture the ultimate launderer will take many months for a small reward at the end of the day.
So what may be the fiscal gain from demonetization, if any? There may be some accounts where people have declared their tax evaded money and come clean. That will definitely add to the government’s revenue kitty. But there has also been a sizeable drop in output and sales since November and this may continue till March going by the slow pace of currency printing versus the asking rate. Net-net, tax collections for both centre and states may actually be lower this year..
In the short run, the demonetization exercise is an economic failure. GDP may fall byone percentage point ie by Rs 1.5 lakh crore and tax collections are unlikely to rise by that amount.
Some have argued there will be medium term gains: that with the informal economy now having come into the formal banking system, more taxes will flow in future years. This argument is not convincing. Some of the money is merely people keeping cash at home out of habit. They won’t be people with an income at all. Likewise, in the millions of Jandhan accounts the one time increase in deposits doesn’t entail any continuous rise in incomes. Hence, even in the slightly medium term of say one year, the negatives from demonetization may outweigh positives in terms of increased taxes or growth.
There may be some gains in digitization. Some more taxis and small shops may go for PayTm or Qr-codes or even POS machines. May be the volume of non cash transactions will rise by a few percentage points. But is this worth losing one percentage point of the GDP, wasting many million manhours standing in queues and a few lives lost on account of the physical and mental pressure.
Demonetization is not just an economic policy failure. The more telling failure is the weaknesses in our character and our institutions. That our laundering systems can brazenly beat our tax and justice system is a matter of shame. That most of the help the tax evaders got was not from poor jandhan account holders but from prosperous jewelers, retailers, relatives, petrol pump owners, transporters is a bigger shame.
To be sure Prime Minister Modi had noble intentions in unearthing black money. He tried to create a movement against black money and tax evasion. He tried to enlist every Indian as a soldier. The lesson from this exercise is that good intent is not enough. Nehru, Mao, Hochiminh were all well intentioned men. They could barely help their countries push up per capita incomes by a few notches. PM Modi must realise, drama and disruption don’t helpeconomies grow. Economies grow when you put more children in school, improve the quality of teachers, boost public health and create an economy that is based on competition and meritocracy. There are no short cuts to growth and equity.
Some still hope at least Rs 1-1.5 lakh crore will not come back to the banks and hence RBI may be able to gift that amount as a dividend to government, which In turn may be used as a fiscal boost. Experts on central bank accounts are sure this won’t be possible. There are many Indians living abroad who may be carrying a few of the old Rs 500 & 1,000 notes with them; several others who may be temporarily abroad may have some cash left back at home. Some people may have simply forgotten that they had stored away cash and may chance upon it after January 1.
Legal experts say RBI is legally bound to honour these claims. Which is why the RBI’s notification and FAQs clearly state that people can exchange old notes till March 31 at various RBI offices. In fact experts say RBI is legally bound to extend this date. In fact the correct procedure ought to be to keep the unclaimed money in a special account in the liabilities side of its balance sheet and use it whenever claims come.
Short point, on February 1 when the budget is prepared, the government cannot legally claim any of the unclaimed money. Only on July 1 when the RBI prepares its balance sheet will one know how much is the unclaimed amount and how the RBI has chosen to treat it. At best the government can hope for a dividend from its current year’s surplus which may well not be as high as the Rs 65,000 crores that governor Rajan declared every year during his tenure. That’s because this year the RBI toohas spent a decent amount of cash accepting banks’ surplus in its reverse repo window and will probably have to do so for many more months in 2017. Hence any fiscal stimulus because of demonetization and an RBI largesse looks difficult.
The Prime Minister has been trying another track. Over the weekend he said he is thinking hard about how to use the cash laundered through Jan Dhan accounts to redistribute to the poor. For starters the government has already capped withdrawals from Jan Dhan accounts to Rs 10,000 a month as also the total deposit amount at Rs 50,000. This means an inconvenience of only 5 months for those who have laundered their money through Jan Dhan accounts.
In any case, a look at the PMJDY website indicates, the number is not humungous. On Nov 9, 19.88 cr of the 25.78 Jan Dhan accounts were active. The amounts in these have swelled from Rs 45,636 cr to Rs 74,322 crores. That works to just Rs 1442 per account. Even assuming this laundering is confined to 3-4 crore accounts, it doesn’t work out to a great deal of money to redistribute. Many of these may be accounts where employers have paid advance salaries for a few months.
Yes the income tax department along with banks can easily ferret out the suspicious accounts, but to follow each of them and capture the ultimate launderer will take many months for a small reward at the end of the day.
So what may be the fiscal gain from demonetization, if any? There may be some accounts where people have declared their tax evaded money and come clean. That will definitely add to the government’s revenue kitty. But there has also been a sizeable drop in output and sales since November and this may continue till March going by the slow pace of currency printing versus the asking rate. Net-net, tax collections for both centre and states may actually be lower this year..
In the short run, the demonetization exercise is an economic failure. GDP may fall byone percentage point ie by Rs 1.5 lakh crore and tax collections are unlikely to rise by that amount.
Some have argued there will be medium term gains: that with the informal economy now having come into the formal banking system, more taxes will flow in future years. This argument is not convincing. Some of the money is merely people keeping cash at home out of habit. They won’t be people with an income at all. Likewise, in the millions of Jandhan accounts the one time increase in deposits doesn’t entail any continuous rise in incomes. Hence, even in the slightly medium term of say one year, the negatives from demonetization may outweigh positives in terms of increased taxes or growth.
There may be some gains in digitization. Some more taxis and small shops may go for PayTm or Qr-codes or even POS machines. May be the volume of non cash transactions will rise by a few percentage points. But is this worth losing one percentage point of the GDP, wasting many million manhours standing in queues and a few lives lost on account of the physical and mental pressure.
Demonetization is not just an economic policy failure. The more telling failure is the weaknesses in our character and our institutions. That our laundering systems can brazenly beat our tax and justice system is a matter of shame. That most of the help the tax evaders got was not from poor jandhan account holders but from prosperous jewelers, retailers, relatives, petrol pump owners, transporters is a bigger shame.
To be sure Prime Minister Modi had noble intentions in unearthing black money. He tried to create a movement against black money and tax evasion. He tried to enlist every Indian as a soldier. The lesson from this exercise is that good intent is not enough. Nehru, Mao, Hochiminh were all well intentioned men. They could barely help their countries push up per capita incomes by a few notches. PM Modi must realise, drama and disruption don’t helpeconomies grow. Economies grow when you put more children in school, improve the quality of teachers, boost public health and create an economy that is based on competition and meritocracy. There are no short cuts to growth and equity.