4 Things Modi Could Have Done Instead of Demonetisation

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The decision to demonetise Rs 500 and Rs 1,000 notes when it was first announced was to tackle black money and fake currency. As the ministry of finance press release accompanying the decision said: “High denomination notes are known to facilitate generation of black money”.

What the Modi government was essentially saying is that it is easier to store black money in the form of high denomination notes. Having demonetised Rs 500 and Rs 1,000 notes, the government decided to launch a Rs 2,000 note, going precisely against its own statement.

The assumption was that people had stored black money in their homes in the form of cash. And by demonetising Rs 500 and Rs 1,000 notes, these notes would be rendered useless. Holders of black money in the form of currency would deposit it into banks and post offices, for the fear of generating an audit trail. Demonetised currency can be deposited into banks and post offices up to December 30, 2016. This money will be credited into the bank account or the post office savings account.

Things haven’t turned out like that. By December 6, 2016, close to 75 per cent of the demonetised currency had already made it back into the banks. Government officials are now saying that they expect almost all the demonetised currency to come back to the banks.

What this essentially means is that those who had black money in the form of cash have managed to get it converted into currency which continues to be legal tender. The hope now is that the government will use information technology to identify people who have deposited their black money into banks, tax them and raise some money in the process.

To what extent this happens remains to be seen. Nevertheless, if the idea was to attack black money in India, there are four things that the Modi government could have done, instead of demonetising high denomination notes and disrupting the entire economy. This would have hit at the heart of the nexus between politicians and builders, which thrives on black money.

1) Stop cash donations to political parties: Currently, political parties need to declare a donation only if it is greater than Rs 20,000. In 2014-2015, 55 per cent of the donation of the national political parties came from those making donations of Rs 20,000 or lower. Hence, the details of these donors are unknown.

If citizens are expected to share their identity with the bank or the post office while depositing their demonetised notes, why should donors of political parties be allowed to hide behind an archaic law, is a question worth asking. This needs to change.

2) Political parties should be brought under Right to Information(RTI): This is currently not the case. If the political parties are brought under the ambit of RTI, they will have to function in a much more transparent way in comparison to what they do now. This would mean keeping proper records of where the funds to finance them are coming from.

3) Real estate should be brought under the Goods and Services Tax(GST): If real estate is brought under GST, builders if they want to claim input tax credit must request documentation from all the suppliers and the contractors that they work with. This will hopefully start cleaning up the real estate business as more and more builders will have to operate through legitimate means. Once they stop using cash in dealings with their suppliers, their proclivity to ask for cash from their customers will also go down.

4) Slash stamp duty rates on real estate transactions: This is one reason why the real estate sector is at the heart of black money. If stamp duties across states are reduced and brought to realistic level, the tendency of people to under-declare the value of real estate transactions will come down. Hence, the proportion of cash transactions will come down.

These four moves would have hit at the heart of the generation of black money. What the government chose to do instead was to demonetise Rs 500 and Rs 1,000 notes, and throw the entire country in a huge disarray.

The column originally appeared in Bangalore Mirror on December 14, 2016

 

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

One Response to 4 Things Modi Could Have Done Instead of Demonetisation

  1. Great Post
    Covers most of the bases. I cant think of any reason why the The third point cannot be enforced and it will be a good moneymaker for the government.

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