With supreme confidence and characteristic courage of conviction, Indian Prime Minister Narendra Modi demonetized high value currency in India in the year 2016. His move surprised the economists , tax and financial experts all over the world and some of them described this step as audacious move.. The after effects of demonetization in India was closely watched around the world and is now being viewed as research topic.
When this surprise decision was announced, Mr. Modi explained to the country men the need for demonetization, the objective of the strategy and he appealed to the people to put up with the temporary problems, for the sake of larger interest of curbing black money and rooting out corruption.
When the high value currency were demonetized, ATMs all over India ran dry as new currency notes were not adequately printed, which resulted in considerable discomfort for the people for a few months. The new currency notes could not be adequately printed before demonetization to keep the secrecy element. In any case, the people appreciated the objectives and cooperated with the government. The prediction of those that demonetization would lead to riots in the streets were proved incorrect and motivated.
After two years, the Reserve Bank of India has announced that over 90% of the demonetised currency has come into the banking system after demonetization .
The basic objective of demonetization was to bring out the hidden black money into the banking system and make them accountable and it was one of the strategies to root out corruption.
When demonetized currency came back into the banking system during the permitted period for exchanging the demonetized notes, it obviously means that the demonetization strategy has worked well and achieved the objective of curbing parallel economy and identifying and exposing many black money holders ,who have hoarded the tax evaded money in currency form.
Everyone including those who have unaccounted cash with them had no alternative other than rushing to the banks to exchange the demonetized currency with the new currency. In the process, those with large sum of unaccounted money who had to rush to the bank to exchange their demonetized cash had to explain the source of income. Further, when such large depositors were identified and the income tax authorities started scrutinizing their funds and their source of income, the black money holders have been forced to pay tax. Many people have been caught in this process and they have paid tax and penalty.
After demonetization, the tax base has enlarged and government’s collection of tax has significantly increased. Total number of income tax returns filed upto 31/08/2018 has shown remarkable growth of 71% crossing 5.42 crores. Thus, the objective of demonetisation has been achieved to a large extent.
Along with the demonetization move, Modi government started measures to promote digitization in a massive way to avoid cash transaction to the extent possible and eliminate tax evasion.
It is now time to objectively evaluate the success or otherwise of the demonetization strategy of Modi government.
The critics have been saying that return of more than 90% of the demonetized currency to banking system mean that demonetization has failed. This is a baseless and illogical argument, since the return of the demonetized currency to the banking system does not mean that black money,which is tax evaded money, automatically becomes the legitimate money. The fact is that the tax evaded money getting into the banking system is now being accounted and the owners of such money now being made to pay tax and penalty.
This explains the reason why the tax base has increased considerably.
The critics further argue that the demonetization step has not resulted in rooting out the black money, since black money continues to be generated by evasion of the tax in the post demonetization era. This is true to some extent.
When demonetization was announced, Mr. Modi clearly said that this was only the first step in eradicating black money and corruption and more steps would follow. He followed the demonetization move with several other measures such as anti benami law etc.
As tax evasion and black money generation continues which results in the continued hoarding of high value currency, this situation points to the fact that periodical demonetization of high value currency is needed.
Curbing of tax evasion by demonetization is not a one stop solution and repetitive exercise is the requirement. This is the lesson that post demonetization scenario in India brings out.