Demonetisation: An impact assessment

Demonetisation had a wide impact as it has effected the withdrawal of nearly 86% of the currency in circulation in India’s high currency using economy. The monetary action of banning, Rs 1000 and Rs 500 notes produced several direct and indirect effects on transaction behaviour as well as on illegal money. As per the CBDTs preliminary reports, it has got a good data base about individuals who have big wealth but are not paying tax. Besides, demonetisation has provided the invaluable service of giving mass awareness campaign against black money. It has promoted the digitalization of transactions and digital payments.

Reduction of the informal economy was another achievement as cash transactions have to be made recorded. Besides, it helped the government to launch several supplementary programmes like the passing of the Benami Transaction Prohibition Amendment Act, Aadhaar-PAN linkage, banning of high value physical transaction etc. to strengthen the fight against black money.  Though a little bit of growth was sacrificed and a short-term welfare loss of the unorganized sector was occurred due to the demonetisation drive; the initiative has helped to clean up the system.

The Economic Survey rightly called demonization as a regime shift. Following are the main impacts of demonetisation if we make a retrospective analysis.

1. Demonetization has strengthened tax administrative measures against black money: Demonetization’s prime objective was fighting black money. It has fortified the tax administrators’ tools, interventions and interactions with the tax payers by producing greater compliance. Here, the initiative has tackled black money both direct and indirect ways.

The direct effect was the amount of black money unearthed from savings made by the people during the demonetization period. There are three black money windows. First is CBDT’s Operation Clean Money (OCM) initiative. As per the preliminary report of the ITD (Income Tax Department), an undisclosed income over Rs 9,334 crore between November 9, 2016 and February 28, 2017 reported. Similarly, approximately 1300 high risk cases were reported under the second phase of the OCM (Status Report May 2017). The exact amount can be estimated after the completion of the long process required. The second window is the Pradhan Mantri Garib Kalyan Yojana where nearly Rs 5000 crore were deposited according to the initial estimates. Third is the extension of Income Disclosure Scheme (IDS) to March 31, 2017. But the amount disclosed during the demonetisation period is yet to be published by the ITD.

The indirect working of the demonetisation has been much stronger as it has strengthened the tad enforcement mechanism. Demonetisation helped to add more people into the tax net. A minimum of 1.56 lakh people is expected to be added to the income tax net under the Operation Clean Money. The tax department has got information about such people when they saved money in the bank accounts during the demonetisation period. The ITD has also made advanced tax administration practices including the Aadhaar-PAN linkage initiative that ultimately led to recording of black money under multiple PAN cards by a single person. According to a Parliamentary information, more than 11.44 lakh permanent account numbers (PANs) were deleted or de-activated as they are cases of multiple PANs.

2. Demonetisation has made a social shake-up of Indian society for detaching practices related with black money. The biggest contribution of demonetisation is its campaign value as a nationwide awareness programme against black money. Although several other initiatives in the past like Income Disclosure Scheme were launched, the readiness of the people to undergo sacrifices expecting the end of black money has made the programme a ‘mass movement against black money’. This will help India to create a compliant and transparent society. Future government steps for transparency, based on Aadhaar identification will also be smooth given the awareness of the people about the need to create a compliant society.

3. Demonetisation has boosted digital payments: One of the welcome turnaround in the demonetisation program was the inseparable link between demonetisation and digitalization of transactions. Inarguably, demonetization encouraged people to embrace digital methods. Though its pace is slow as there are several hindrances which certainly are getting reduced, demonetisation has inaugurated the march towards cashless society with a bang. Popularization of digital payment methods, instruments and institutions prove that demonetisation has facilitated digital transactions. PoS machines, and use of card based payments are very popular now compared to the pre-demonetisation period. Among the more sophisticated groups, online payments have become common.

4. Demonetisation has propelled accessory programmes to fight black money: Another remarkable feature of demonetisation is that it has created several other accessory measures that are needed to fight black money. Alone, demonetisation is weak; but together with these newly launched initiatives, it can create a compliant society. The main such steps are: Benami Prohibition Amendment Act, banning of cash transactions above Rs 3 lakh, Aadhaar – PAN linkage, Mandatory PAN requirement for bank savings above Rs 50000, non-cash settlement of property transactions etc. These measures have reduced the circumference of parallel economy.

5. Demonetisation has reduced the informal economy: With the increased use of digital payments, economic transactions become recorded. Along with the highly digital documented GST, India’s informal sector is getting absorbed into the formal economy.

6. Enhanced Tax Compliance: Demonetisation has addressed one of the chief demerit of India’s direct tax system – poor compliance. Once savings, payments, income flows and other transactions are digitalized and recorded, it will give way to a better compliant society. Cashless and digital transaction society is the infrastructural foundation of a compliant society.

7. On the demerit side, demonetisation has produced some unavoidable negative effects in the short/medium term. It has led to a decline in economic activities and thus contributed to low GDP growth for at least couple of quarters. Similarly, the unorganized sector daily wage earners and other low-income groups have suffered from income fall during the demonetisation period.

Altogether, demonetisation has produced some pleasant and surprising good effects on the economy; whatever may be the quality of economic logic behind it. Given the short-term and medium term negative feed-back effects are gone, government can continue with the group of supportive measures to eradicate the evil of black money.