Yesterday was the second anniversary of Demonetisation. To mark the second-year anniversary of an event which shook the nation, to say the least, Finance Minister posted a detailed defence of the decision.
Jaitley spoke how demonetisation’s broader goal was “formalisation” of the system, how tax collected (both direct and indirect) has increased and about the digitalisation of the economy.
Formalisation of saving
The note by Jaitley starts with this, “Demonetisation is a key step in a chain of important decisions taken by the Government to formalise the economy.” He then goes on say that Demonetisation helped in targetting the black money outside of the country. Asset holders brought back this money and a penal tax was imposed upon them and those who failed to bring back the money were charged under Black Money Act.
Firstly, Jaitley failed to specify how many of these “asset holders” were recognised, how much money was actually collected as penal tax and how many were charged under the Black Money Act. As reported by The Wire, the only information provided by the government of India on the prosecution of tax evaders was provided in January this year. “During FY 2017-18(upto the end of November 2017), the Department filed Prosecution complaints for various offences in 2225 cases compared to 784 for the corresponding period in the immediately preceding year, marking an increase of 184%,” says the press release. However, this too did not shed light on the amount of tax evaded.
Secondly, in an interview, former RBI Governor Raghuram Rajan said, “If you believe that it was the money was black money, it was in their basement, it wasn’t turning any interest. So the government was effectively getting an interest-free loan from the people who held this cash. Once this money came into the formal system, if you haven’t identified it as black money, these people are now gaining an interest on it. So you are paying people for the black money they have put into the system.”
"Black money that was lying idle before #demonetisation is now earning interest. Govt managed to convert Black money into white & is paying Rs 24000 Crore Interest yearly on this 'Newly Washed' Black Money" – Raghuram RajanVia – Hindustan Times (Oct 2017)
Posted by Unofficial: Subramanian Swamy on Thursday, November 8, 2018
Jaitley also said that transaction through Unified Payment Interface (UPI), meant for the real-time transaction between two mobiles has grown from Rs 0.5 billion in October 2016 to Rs 598 billion in September 2018. It may be noted that while transactions through UPI saw a steep increase in the months following the note ban, however, as per present day scenario, things don’t seem too rosy. As reported by Livemint in August this year, two years after its inception, the number transaction fell by 4.5%.
Apart from this, as The Wire reports, UPI still remains a person-to-person transaction. This indicates that it may have replaced formal net banking channels.
Also, digitalisation has reduced the cash usage would be an exaggeration. India’s currency-to-GDP ratio was over 12% before demonetisation. It has risen to 11.3% after falling to 6% in November 2016, and it continues to soar.
Jaitley, while quoting percentage increase in the number of people paying taxes. While he remains mostly remains correct on the number, it may be noted that direct tax collections has gone up, the direct tax-GDP ratio has not seen a significant rise.