Demonetisation: Alternate Measures Could Have Adopted To Tackle Black Money

November 08, 2016, a date whittled in the history of India's Economic Scenario.

"Demonetisation": An act of stripping a currency unit of its status as legal tender. A Word which will remembered for a long time.

Demonetisation has been touted as a starting point to curb the flow of black and counterfeit money in the country, especially when majority of it is stashed in the form of "cash". The manner in which this decision has been taken and is being implemented is undoubtedly monumental. It just seeks to achieve not just two but many aims with this one decision.

Besides lethally combating fake currency menace, terror funding, drug racket funding, illegal arms racket, corrupt money and money laundering menace, purposive inflationary trends in certain sectors of economy such as real estate and gold and jewellery sectors etc., get restrained with demonetization.

This measure also seeks to educate and motivate people for voluntary tax compliance without ignoring the need and necessity of enforcement with penal consequences for those who are recalcitrant and defiant. Under this scheme the Government has enticed those Tax payers who did not disclose their undisclosed income under the "The Income Declaration Scheme 2016" and found themselves saddled with undeclared cash following the demonetization of Rs.500 and Rs. 1000 old currency notes.

Thus, Demonetisation drive undertaken by the Central Government would enable it to tackle mainly three issues being a parallel economy, counterfeit currency and terror financing which was plaguing the economy.

Cash being a principal component for both Real Estate and Jewellery Market, both these sectors faced the worst nightmares. The unbanked and informal parallel economy of the country too faced the heat.

Despite the criticism faced, the initiative undertaken by the government is a welcome move thereby creating a digital India and a transparent economy.

This move has come after 36 long years of "black money era".

Perhaps, the sector that has benefitted the most is the banking and financial services sector. For the banks, that are reeling under NPAs and large loan defaults, the move has provided the necessary boost as retail cash holdings have increased in the short-run. While some say the GDP will have an impact in the second half of the year while others are of the view that the black money infused in the system will bring down the interest rates and boost the economy. What remains to be seen is the actual impact which has been positive so far.

That being said, the greatest challenge for Modi led Government would be to curb re-generation of black money. One of the measures which could help control this by imposing "Banking Transaction Tax". A move already suggested to the Government as a subsequent reform vis-à-vis other taxes currently in play. With BTT imposed, it will bring many more people into a different kind of informal tax net. One will have to wait for a while for another reform to be initiated, with GST already missing the April deadlines, pursuant to which the Government cannot risk another set back by rolling out substantial reforms any further, at least till GST sees the light of the day.

Technically drive of demonetisation creating a liquidity crunch, it has broadly the following impacts:

1. Short term liquidity crunch to affect the daily wage earners, small traders etc who function outside the preview of a formal economy;
2. Consumption of goods suffers a major hit on account of shortage of spending capacity;
3. Negative impact on inflation;
4. Temporary growth dip with fall in GDP rates;
5. Temporary increase in bank deposits which could reduce the interest rates;
6. A positive move towards electronic means for making payments and encouraging digital India.

Demonetisation will place a temporary brake on illegal transactions in cash until operators figure out alternative ways of financing such transactions methods other than demonetisation in order to curb black money which could work in favour of the Government could be as follows:

1. Transactions relating to sale/purchase of real estate property should be monitored more closely and probably on weekly basis with a mechanism which would fetch information as to whether the agreement value of the property is indeed the sale/fair market value of the property and if not, then to make accountable the buyer for the difference.
2. Integrate all land/property registrations as also property tax payments/I.T. Department records together with Banks to assist in digging out date of registrations, payments made and amounts offered for capital gains tax for the relevant year in which the transfer of property takes place.
3. Implementation of stricter laws and regulations such as imposing much higher tax rates on black money coupled with civil punishments.
4. Accountability for gold investments supported with relevant proofs of investment etc.