With many ATMs loaded again, the immediate blow of demonetisation has begun to ease. This week, the Prime Minister defended his November 8, 2016 decision in Parliament. But the debate remains open, and the full impact of the move will unfold over the rest of the year. Macroeconomy expert
Ila Patnaik described several aspects of demonetisation to readers of The Indian Express at the second edition of Express Explained in Mumbai recently. Edited excerpts of audience round with P Vaidyanathan Iyer.
Should the government have waited for better penetration of Point of Sale terminals before demonetising, given that a less-cash economy/digitisation was one of its goals?
Ganesh Patro Yellumahanthi,
Student, S P Jain Institute of Management and Research
Not waited… What it could have done was to actively change the regulatory environment to one that allowed for more PoS machines, computation, etc.
Now that a lot of money has been ‘mapped’ and data has been generated indicating where it flows, is it going to raise tax compliance in the country?
Sheetal K Setia,
As I said earlier, it depends really on what happens now. Suppose it is decided that all political parties will only take money digitally, just in the way that I am supposed to pay my sabziwallah now. If that is the law, then yes, there will be a lot of progress…
Would mandatorily digitising more than 50% of currency have been a better idea than demonetisation to check counterfeiting and black money?
For counterfeiting, you need better security features, prosecution mechanisms, etc. For black money, there are methods to improve tax compliance, and you should focus on those. GST is supposed to improve tax compliance, but too many slabs have been proposed, leaving scope for evasion. But that’s a different discussion altogether.
How long do you think our economy can go without taxing agriculture?
It’s up to the politicians, really… It’s something that should have been done beyond a certain limit, at least; it can’t be completely exempt.
It is said that the government gave only a day’s time to the Reserve Bank of India to plan for demonetisation. Doesn’t the RBI need to be consulted before such a decision?
In fact, the RBI Governor has said that they were in consultation with the government since January (2016). The RBI was given adequate notice. They could obviously have planned better. And secrecy is no excuse — when a country goes to war, it is always kept a secret, but does it mean it does not plan? We did the nuclear blasts which was such a well-guarded secret, but we also planned for it!
Would measures like revisiting double taxation avoidance agreements with other countries be a more effective step in checking tax evasion?
Associate Fellow, Observer Research Foundation
It is one of the ways of improving compliance, yes. But again, the costs and benefits of revisiting those must be weighed. We got into DTAs for a purpose, it was because we wanted that money to come in, we wanted Indian companies to get foreign capital. It’s not that everything is used for round-tripping, so one needs to think about it.
What should be the next step in the war on black money and counterfeit currency?
Improve tax compliance, beginning with political funding.
A recent Oxfam report says 57 persons own 70% of the economy, so as you have suggested 30% of the economy is black, how much of that would you think is kept with those 57 persons? And why didn’t we see them in queues outside banks?
Very good question… I wish I had an answer! Though I am not sure any of this (demonetisation) has affected any of those people!