Black is back - and with a bang, not a whimper. And whatever else demonetisation was meant to do, it has not succeeded in removing black money. In fact, it has alarmingly few successes to show. You could say that fake notes are out and will take time to come back - a victory, of sorts. The nation will not be undermined by neighbours knocking off our new currency. And you could say we all have and hopefully will have many more crisp new notes that fit our wallets more easily. No bonus points for aesthetics: the Rs 2000 note is closer to a mad version of calendar art than currency design. But the Reserve Bank of India has proudly told us that it is the first completely indigenously designed note, as they say, ever. And that is a true fact (sic). I guess Surat is closer to Mumbai than NID, and that explains the choice of colours, fonts and other embellishments. But Make in India it is.
Anyway, back to the original problem. Black is back. With old currency continuing to stream into banks, it is now obvious that billions that were supposed to have gone up in smoke really haven't. In fact, nothing of the sort has happened. What demonetisation has clearly shown is that private enterprise, good or bad, is more nimble, intelligent, and successful than the mandarins scattered in Central Delhi and Mumbai. If this is what the Deputy Governor of the Reserve Bank of India calls planning, God help us if we are ever really hit by a financial tsunami.
The success of the conversion of black money in 40-odd days can be measured by three yardsticks. First, that of the Rs 15.6 lakh crores that was floating around as of November 8, almost Rs 14 lakh crores has been turned in. So, at most, we are looking at some measly Rs 1.6 lakh crores not coming back or disappearing. Secondly, the Government and RBI have resorted to no less than (and counting) 60 notifications since November 8 to try and plug the many leaks in the attempt to stop the flow of black money into banks. Thirdly, the conversion rate for old black to new black is down to under 10% from a high of 30%. As one businessmen said, "Those who panicked paid 30%, those who waited got it at 20%, and now give me the cash and tomorrow you can have new notes at 8%."
And why are we saying it's back to black? Because that is what has happened. People who had black money first used family to deposit as much through Rs 2.5 lakh ceiling. But that does not account for very much. They then used brokers to find means of converting the balance at a commission. That turned out to be easy as there were many willing to be conduits for black money, including bankers. So old black money currency notes have gone into the bank accounts of the willing or converted through the Rs 4000 scheme, petrol stations etc., and instead people (those holding black) have got that money back in new currency notes (less commission). This money is the new black. It is not taxed paid or accounted for. It has disappeared. Into lockers, trunks and under beds.
This conversion has been at a cost, but at a cost much lower than what the government is hitting black marketeers with. And fundamentally, that is what the government hasn't understood about the issue of black money. Not many who have had black money are going to declare it with a penalty rate of 40% (as in the Income Declaration Scheme of September and 50% plus now under
Pradhan Mantri Garib Kalyan Yojana). Although the government did collect Rs 55,000 crores through IDS, count the number of people who made disclosures: 65,000. The conundrum that the government faced was how to get those with black to cough up without irritating those who pay their taxes. A low rate of tax they believed would annoy the real tax-paying public and wouldn't be fair. Maybe, but since only 12 million-odd paid taxes any way, (and many of them also hold black) there was hardly going to be a revolution led by white-collar workers. And any such emerging threat could have been pacified with telling the public that if we collect Rs 4 lakh crore, the "good guys" will benefit with a reduced tax rate.
Indonesia, which ranks with India in corruption, is running a much more revolutionary scheme, which has already collected more than $311 billion* (more than 20 lakh crore). It said to hell with good guys for the moment and used single-digit tax rates for declaring assets. Maybe the tax collection wasn't that high, but it brought all this money back into the market.
You really have to ask yourself if this torture that everyone (except politicians and the very rich) in the country went through was worth the Rs 1.5 lakh crores that may not make it back into RBI's chest? Was it worth the plummeting sales, the loss of jobs and the time? Couldn't we have done it better? Why weren't the officials in charge prepared with the Rs 7-8 lakh crores in currency when this was launched? Had they been, then the windows for conversion could have been shorter and quicker and the myriad changing exemptions for petrol, airlines (BTW who buys airline tickets in cash?) train, hospitals etc. would not have been needed. At 500 people a day, the 70,000 banks would have dealt with 35 crore people in ten days (that's just under a third of India's population and more than the 25 crore Jan Dhan accounts). Just shows what a little planning would have done.
Why wasn't there an amnesty scheme with demonetisation from the start? Offering rates like those that black market brokers offered? But by the time the government got round to the idea, the brokers had exchanged most of the money. And with a tax rate of 50%, it is very unlikely to collect very much money. And so it will be another embarrassment: another black money scheme that does not work.
If the idea was to share the ill-gotten wealth with the people of India, well, in a perverse way, the government has succeeded to a small extent. The conversion of black money has come at a cost, and brokers,
dalals, hawala traders, corrupt bankers, cheating petrol pump owners and chemists, daily wagers willing to stand in queue as mules, and those willing to rent out their Jan Dhan accounts have all become richer, some by crores, others by a few thousand.
Of course there will be long term benefits. More people now know about digital forms of payment, and slowly as smartphones spread, more transactions will happen that way. And if the government goes ahead with its promise to fund political parties in elections, that will remove the second largest reason for black money. More also has to be done on the property market to make it viable for people to buy in white only.
But for now the tragedy is that for the moment all that black money has disappeared again and will be back to do what it has been doing for generations: running a parallel economy. Schemes are easy to float, but you need careful strategic thinking before implementing them, and that wasn't there.
*In Indonesia: To this date, the total assets declared by 512,315 taxpayers participating in the tax amnesty program stand at Rp 4,043.66 trillion (US$311 billion).(Ishwari Bajpai is Senior Advisor at NDTV)Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.