The chant today for global competitiveness is “Ease of Doing Business”. Yet, when the Government boasts about India’s achievement of getting into the World Bank Group’s Top 100 ranking for the first time since Independence, the opposition is not willing to give it any credit.
What is this ranking all about? Well, the lower the numerical value assigned to a country, the higher is its ranking. In the 2018 rankings, New Zealand secured the 1st spot and Somalia the 190th. India was a distant 100. Should we be proud of it?
The ranking concept was first introduced by Mr. Simeon Djanlov and his team in a working paper presented under the title “The Regulation of Entry” in the year 2000. The abstract of the paper reads:
We present new data on the regulation of entry of start-up firms in 85 countries. The data cover the number of procedures, official time, and official cost that a start-up must bear before it can operate legally. The official costs of entry are extremely high in most countries. Countries with heavier regulation of entry have higher corruption and larger unofficial economies, but not better quality of public or private goods. Countries with more democratic and limited governments have lighter regulation of entry. The evidence is inconsistent with public interest theories of regulation, but supports the public choice view that entry regulation benefits politicians and bureaucrats.
It is in the above context that we need to view India’s ranking secured for the next year. The ranks are given on the basis of various parameters like Dealing with Construction Permits, Power Connections, Property Registration, Credit Availability, Protection of Minority Interest, Tax Administration, Trade barriers, Enforcement of Contracts, Debt Enforcement/Insolvency, Labour Laws and the like.
India was ranked 116 in the year 2006 and steadily slipped to 142 in 2014 – the drop can be only attributed to the institutionalised corruption of those years. The reforms introduced by the new Modi Government in 2014 had an immediate and telling effect on India’s ranking in 2015 and 2016 – 130, which was the 2007 level.
The year 2016 is seen as a landmark year for independent India in view of the Government’s decision to withdraw rupee notes of 500 and 1000 denominations. The world looked at us with shock and awe. Doomsday economists and analysts went ballistic. Yet, a year after demonetisation, the world acknowledges the success of its intended impact by ranking India at 100 – a 30-rank leap. Credit for this unprecedented performance should certainly go to the masterstoke: Demonetisation.
The quantum leap India has made in making credit widely available is solely due to the cash that has flowed into the banks that were in a stuggle to stay afloat because of their bad loans given to big corporates. Note here that in providing credit, India has achieved the 29th rank. Taxation reforms constitute another offshoot of demonetisation since it has brought about increased transparancy in tax assessments and prompted the Government to liberalise the assessment processes.
The process of nation building is certainly on the right track. The fiercest of supporters of the Modi Sarkar who had nonetheless raised their eyebrows over the November 8, 2016 decision can now sit back and heave a sigh of relief. Demonetisation was a life-sustaining surgery done to the economy when it was healthy – surgeries are best done when the body can sustain the shock. Today, after the major surgery, a resurgent Indian economy is back on track. When the 2019 report comes out, GST implementation will also be factored in, and don’t be surprised if we see ourselves in the Top 50!
(The writer is a Charted Accountant, Convenor of Swadeshi Jagaran Manch, Kerala)
India has been a tax-averse country, mostly dependent on cash for transactions. Demonetisation is a move to challenge and change this behaviour
-Prof. (Dr.) Gourav Vallabh-
Last year in November Prime minister Narendra Modi announced the most daring step towards cleansing our economy of illicit notes and corruption. Though the present government has vowed to leave no stone unturned to give us a transparent and healthy economy, demonetisation can be viewed as one of such move. The entire county on the eve of November 8 last year was at first taken aback when it was announced but gradually their faith in our decision makers was restored and we sailed through this turmoil in more or less smooth manner. After a year we are in a situation to quantify the benefits of this farsighted decision. If we take it purely from RBI’s liability reduction perspective, then it might not look so rewarding as most of the notes demonetised had returned back to the bank and the central bank could not capitalize on the lost liability as expected. But, this is just one and a very small side of the move.
Demonetisation was announced after a series of corrective measures taken by the government in which the income declaration scheme was one of them. But demonetisation invalidated the notes which were till now hoarded in the form of cash and were not contributing to the Capital Formation process. This currency is forced to either come into the legal financial system and contribute or move out of the system and relinquish central bank”s liability. Many say that “How much black money was captured?”, the money itself doesn”t bear any colour except the ones in which it is printed but the way of its acquisition renders it black or white. With this exercise of returning all the money back into the bank, the central bank or other commercial banks could generate a huge database on which it can work out to find out those who rendered black colour to the money. So now the onus is on the system and agencies to track the transaction and come out with the true colour. I feel that by taking the help of data analytics of transaction pattern of the individual account holder lot can be achieved in a short time and initial evidence suggests that broadly government is moving in this direction. The hoarders of cash used illicit measures to accommodate their cash in various accounts and the government is working on 1.8 million such tarnished accounts.
IT Jumps
Income tax returned filed until August 5, 2017, rose up to 2.23 Crore which is a jump of 24.7% from the previous year same period. Of this, the return filed by individual new taxpayers rose by 25.3% which is a significant jump from any perspective. Tax collection rose by 41.79 % (advance) and 34.25% (SAT) in the same period. We have also seen a considerable increase in indirect tax base which will continue to expand because of implementation of GST.
India”s tax revenue as a percentage of GDP was 16.7% in 2016 as compared to 25.4% in the US and 30.3% in Japan. In order to gear up its contribution in its growth, India has a huge potential as only 1% of the population pays the tax out of which only 172000 non-salaried people declared their income above 50 lakhs. This is very disheartening and the government needs to tap this opportunity effectively. The above point was also appropriately highlighted in the last budget speech of FM when he shared data regarding the number of taxpayers and high-end car sales, which are not having any sync.
GST Gains
After the implementation of GST, we have seen that the indirect tax collection data has been quietly favourable. We had already collected Rs. 92,283 crore for July 17 from just 64.42 % of the registered taxpayers. There has been an addition of around 10-12 lakhs new taxpayers in GST. If we get the tax from the other 35 % of the registered taxpayers and the newly added taxpayers (10-12 lakhs) the revenue from the indirect taxes would also shoot up.
After demonetisation, with all the cash coming back to the banks and governments recent announcement of recapitalization of the PSU banks, it would enable the economy to sustain lower interest rates, as the banks are flooded with liquidity. So demonetisation had an addition unanticipated gain to the economy of low-interest rate regime. Low interest primarily reduces Cost of Capital for Business and makes an earlier unviable project as viable. The small enterprises which has largely remained outside the formal financial system would also now be able to benefit from the low- rate lending of the banks and this would contribute to our GDP and employment statistics. Now banks would also be able to make healthy lending as the Big data with GST and digitization would enable them to scrutinize the prospective borrowers which will reduce NPA’s in days to come.
Post-Demo Shift
Post-demo we have also seen a shift in the investment pattern from saving/current accounts to Mutual Funds. As of June 17 total, MF assets amounted to Rs.18.96 lakh Crore as compared to 16.28 lakh crore on October 16. Thus registering a contribution of Rs. 33500 crore/month as compared to Rs 7000 Crore/month from Oct 15 to June 16. This is indicative of the robustness of our industries and growth perspective as perceived by the investors.
India has precisely been a tax-averse country, mostly dependent on cash for their transactions. This behaviour has been cultivated for centuries. Demonetisation was a move to challenge and change this behaviour by shifting from cash to digital regime. Post demo we saw a surge in the use of the electronic method for payments. According to NPCI reports IMPS, BHIM and UPI have registered 6.4 million users as on March 17 as compared to 4.4 million on January 17 and 0.1 million on October 17 just prior to demo. Demonetisation coupled with digitization is a move to clean the political funding also.
The immediate effect of demonetization was also seen in the reduction in the threat to internal security. From 8th November 2016 to 29th November 2016 we had observed an 80 % drop in stone pelting and 60 % drop in terrorist activities in the Kashmir valley. As most of them were using fake currencies to fund their activities. In the same period, there were 469 Naxalite surrenders in the Naxal affected areas of Chattisgarh, Andhra Pradesh, Jharkhand, Odisha and Bihar, which is the highest number in any month. In Odisha alone in Malkangiri district, 70 % of the Naxalites surrendered in the same period.
( The writer is a Professor of Finance, XLRI Jamshedpur)
The following are the pull strategies adopted by the government so as to increase the use of digital mode post demonetisation:
– Transaction fees waived off on credit and debit cards up to Rs 2000
– Reduced petrol and diesel price for digital wallet customers
– RuPay Kisan Cards’ to be issued to almost 4.32 crore Kisan credit card owners
– In 10,00,000 villages with the population of less than 10,000 persons, 2 PoS machine would be provided
– States like Maharashtra, Goa and Assam have also offered a slew of incentives to go digital
– In Mumbai from January 1, 2017, 0.5 per cent reduction on suburban seasonal railway tickets for all digital payments
– Free accident insurance up to Rs 10 lakh would be provided to the customers buying tickets online
– 10 per cent discount on toll charges using digital identification cards and pegging monthly rent for PoS machines at Rs 100
– Businesses with yearly profit of up to Rs 2 crore would save up to 30 per cent in tax payment
– The RBI, on its part, slashed MDR is levied to a merchant by a bank for credit and debit card services to almost 0.25 per cent for transactions between Rs 1,000 and Rs 2,000 for all transactions from January 1, 2017
(Source: The Demonetisation Phenomenon, edited by Prabhat Pankaj and Sheenu Jain, published by Bloomsbury India)
There was a reason to believe that black money was heavily present in the informal sector of the economy and a big section of society has remained without being taxed
-Madan Diwan-
The opponents of demonetisation move are those who are actually responsible for the creation of excess cash in Indian Economy. The first demonetisation exercise in 1946 by interim Government of India, with C.D. Deshmukh as RBI Governor, had demonetised only Rs. 143.97 crores worth of 100 Rupee currency notes. That time, total currency in circulation was Rs. 1235.93 crores.
During the demonetisation exercise in 1978, the value of high denomination notes in circulation was about Rs. 180 crores. The value of currency demonetised on November 8, 2016 was Rs. 14.2 lakh crores. The enormity of cash printed by the government is so much that it gives rise to speculation – who were the real beneficiaries of this printed cash? The reasons of generation of black money have remained the same since independence. Prevalence of a large amount of cash in the economy is an incentive for generation of black money. This black wealth is a product of corrupt practices and a result of lack of control.
Corruption is an age-old issue for hundreds of years. Measures and efforts to curb corruption seem to have been taken at different stages. As per the “Committee on Prevention of Corruption, Government of India”, which had eminent members like R. K. Khadilkar and Nath Pai; the first known prosecution was in 1949-50 of some Ministers in Rajasthan and Vindhya Pradesh. The efforts of a Committee chaired by Acharya Kriplani in 1953 and by Vivian Bose Commission in 1956 were to reduce corruption in society and build a strong economy.
White Paper
The UPA government published a white paper on black money in 2012, clearly stating several reasons of generation and prevalence of black money in the country. It also quoted that in 1983-84 existence of black money in the economy was to the extent of 19-21 % of the GDP, which in itself was very high. However, the UPA government shied away from taking the necessary steps to curb the menace of black money. Amongst the measures suggested in the white paper such as Adhar linking, compulsory use of PAN in gold and jewellery transactions, fast implementation of GST-N, etc., were never given legal teeth. The issue of excess cash in the system was never addressed. In fact, UPA government was following the footsteps of international practices and did not think out of the box. The CBDT Report of 2012 had suggested several measures that would have affected the liberty of business establishments. The NDA government”s demonetisation move ensured that the steps taken by him improve India’s place in the index of ease of doing business.
The Supreme Court had to intervene due to indecisive UPA Government”s inertia for tackling black money. Formation of SIT was the first Cabinet decision by the Modi Government. The SIT was only to deal with transactions that had left some trail or on account of information shared by several sources. Non-compliance of taxation was the real cause of for low formation of capital. Incentives to savings were reportedly driven by few tax exemptions. Withdrawal of a series of 500 note did not yield much result. A need was felt to nudge holders of cash to come to the mainstream. The withdrawal of 500 and 1000 Rupee notes overnight was the best way to suck excess cash liquidity from the economy. The use of cash for compensating public servants for various favours was stopped. Hundreds of points that were mentioned in various reports about the generation of black money were addressed instantly. A barrier to stop indiscriminate use of cash was erected. A major roadblock to national prosperity was removed by curbing cash transactions in the illegal and informal market.
The SBNs suddenly became a weapon in the hands of Modiji to track its owners and establish a legitimacy of each user. The anonymity of ownership of cash notes ended and created a money trail to help the government to trace owners of each and every note. Very recently a news channel carried a story how son-in-law of a particular family benefitted in adding comfort to his travel due to bookings made by few unscrupulous elements. Attempts are to close the case as cash paid to the agent is anonymous. The anonymity of ownership ensured that neither the giver nor the taker could have been tracked for the non-compliance of tax and generation of black money. Many more such incidences will be in public domain soon.
With the issuance of new high denomination notes, stringent withdrawal restrictions in place, it should be easy to track non-compliance of taxation. Governments’ digital push has also ensured higher use of plastic and electronic currency. Demonetisation has yielded more number of taxpayers to the exchequer. This exercise has also helped to eliminate clandestine dealings generating black wealth. The fundamental reason for suppression of receipts and non-compliance of incidence of the tax was the ease of handling cash. The gold import restrictions and increased import duties; taxation of goldsmiths, jewellers and jewellery merchants alone could not have shown any results. From the deadly night of November 8, 2016; tracks of cash have suddenly become visible. The midnight oil burned by several jewellers is a witness to the success of demonetization.
There was a reason to believe that black money was heavily present in the informal sector of the economy and a big section of society has remained without being taxed. Businesses were hiding behind age-old legislation of paying employees in cash, to defend the actions of underpaying employees. Most of the informal sector transacted in cash and was successful in keeping taxmen at bay. The politicians and local officers made few bucks from these recalcitrant players. During demonetisation drive, the amendment to law shifting mode of labour payment from cash to bank or digital has been approved. Now small businesses will have to pay a complete salary that too via Bank and cannot submit fraudulent vouchers for creating further cash. The call of opposition that many jobs are lost in the informal sector is totally false. The street vendors, unorganized small units, mathadi / headload workers groups were controlling points of a certain party, to control markets and exert influence on traders. Cooperative sector too was reportedly used for generation and absorption of cash. Halo was created around the sector virtually forcing every political dispensation keeping it out of thorough legal scrutiny. RBI and GOI did not budge to the pressure groups which were too keen to act as change agents during this process of demonetisation. Post demonetisation the members of cooperatives and families operating in unorganized markets have realized they have a champion in Modiji, who will ensure that due rewards/wages are paid and none is used as the political instrument.
A lot of black money was laundered by few shell companies regularly. Demonetisation helped taxmen to identify companies that were responsible for using various accounts to absorb SBNs. Several Bank officials were arrested assisting these transactions. Very long chain of this group which destabilized economy for too long has gone behind bars.
Modiji’s promise to provide housing for all is more than a dream to poor families in India i.e. Bharat. Not a single transaction was possible without a huge amount of cash changing hands. Most of the developers had political blessings and would act like a front or partners of some politicians. After demonetisation, real estate prices have crashed. Though the prices are not within the range of ordinary families yet, the process of weeding out slush money from Real Estate has just begun. The model of affordable housing can now be developed without fear of backlash from organised oligopolistic group of developers.
NGOs Under Scanner
The NGO sector heavily dependent on foreign money stopped short of calling names of BJP and its affiliates. A few NGOs’ are under scanner now, for engaging in activities akin to money exchange taking advantage of various provisions of the IT Act. Several Committees had recommended curbs of non-official sector over last 7 decades. Civil Society made noise about electoral reform. Questions were raised about the integrity of voters. However, successive Congress Governments did not move an inch, neither to act against NGOs nor to amend scheme of political funding. Demonetisation debate ensured that many changes were introduced by Modi Government. The issuance of election bonds will keep names confidential but total anonymity of cash will be lost.
(The writers is a Social Economist and an Entrepreneur)
-Shshank Saurav-
November will mark one year of the surgical strike on black money even as reliable information is available now to analyse the outcome of the courageous decision taken by the Modi- led NDA government. The Economic survey admits that demonetisation has impacted the GDP growth by as much as 1.2% (decrease in real GDP growth in second half of FY 2016-17) and sometime back RBI also came out with the demonetisation data in its annual report. If we talk about tangible gains of demonetisation then roughly 16,000 cr. of RBI’s liability has been extinguished.
If we just go by the tangible data to measure the success of the demonetisation scheme then we are bound to get the misleading results. There were various unstated objectives which have been achieved by now and we need to understand their impact on the economy to have a holistic picture.
1. Increase in tax base – US Supreme pronounced in 1927 that “taxes are what we pay for a civilized society” and this statement holds good for India as well. We have a very low tax base and as a result, very few individuals share the burden while the others disproportionately enjoy at the cost of others. Direct taxes are based on the principle of equity and this can be achieved in true sense only when the tax base is increased. Demonetisation has played a good role in bringing more individuals to tax net and growth in new taxpayer as well as returned income has been noticed (refer table 1 below).
2. Fall in interest rates- Demonetisation has resulted in surge of deposits and banks have passed the benefit of increased liquidity as well as reduced policy rates to borrowers (refer table 2). It will have an impact in near term when the private investment will be rebound and capital formation process gets accelerated. A lower interest rate always has a risk of triggering inflationary pressure in the economy but current regime should be credited for lowering the interest rate along with containing the inflation at a low rate.
3. Operation clean money- Income tax department has got a large volume of data relating to cash deposited post demonetisation. Department is analyzing this data and matching the same with income tax return of the individuals. This is a very significant step in checking the black money as amount deposited in the bank account for which source of income can’t be explained may become taxable. Most important point in this entire exercise is that such steps will send a message to tax evaders that they may not get away with their wrongdoings and such people will fear the law.
4. Increase in digital transactions- Digital transactions leave a trail which makes it difficult for the person entering into the transaction to keep it unaccounted. Demonetisation has resulted into phenomenal growth in digital transactions (more particularly in NEFT and IMPS mode of settlement). Impact of increase in digital transaction has to be seen along with GST framework in which end-to-end transaction trail is available with government authorities which gives very little room to keep the transaction out of the tax net.
Demonetisation has long-term impact on the economy and it was sort of structural reform. The latest report issued by World Bank on “Ease of Doing Business” acknowledges the steps taken by the government and India has moved up by thirty notches. It has been three and half years since Modi resumed the office and our ranking improved from 142nd to 100th for which PM must be lauded.
( The writer is a Chartered Accountant and Anti Money-Laundering Specialist)
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