This is a rejoinder to the Steve Forbes article What India Has Done To Its Money Is Sickening And Immoral which terms demonetization as immoral.
Bharat has 6,40,867 villages ( 2011 census) whereas out of the total bank branches of 1,34,014, only 50,421 branches are located in villages. However, Bharat Post has 1,54,939 offices across the country and majority of the offices are in villages. 97% of the Indian villages are with population of less than 5,000 and the road connectivity of Bhartiya villages is also poor.
When rapid bank branches expansion took place post nationalization of banks in 1969, The Average Population per Bank Branch (APBB) which was 64,000 in 1969 improved to 12,100 as on 31.3.2013. As per Census 2011, 58.7% households (67.8% urban & 54.4% rural ) are availing banking services in the country.
Bank branches per 10,000 adult population in 2014.
From the above data, one can easily infer that Bharat has miles to go in order to achieve total financial inclusion. The above data also clearly indicates that the brick and mortar financial system expansion has not been totally successful in India and infrastructure bottlenecks are one of the main reasons behind this.
Bharat still has a population of 23.3 crores who do not have access to basic banking facility. Bharat has 24.5 million credit cards and 661.8 million debit cards as on March, 2016, which is not a significant number considering the total population size of 1.22 billion as per the 2011 census.
Therefore, the argument put forth in the article by Steve Forbes that the demonetization resorted to by the Bhartiya government by impounding the currency notes of Rs.500 and Rs.1000 has affected the common man the most is factually correct. However, Steve Forbes is missing the wood for the trees because he is either unaware or ignored the following vital information, which is equally important in this context.
The percentage of people who pay tax is abysmally low.
As per the government data only 2.87 crore individuals filed income tax returns for the year 2012-13 but 1.62 crore out of them did not pay any tax. In other words, the real tax payers are just 1.25 crore which is one percent of the country’s population !!! Government data also reveals only 24 lakh people have declared their incomes as above Rs. 10 lakh whereas 25 lakh cars are bought per year since 2011!!!
Estimates of Bharat’s black money
Some reports claim a total of US$1.06 trillion is held as black money in Switzerland. Other reports, including those reported by the Swiss Bankers Association and the Government of Switzerland, claim the total amount held in all Swiss bank accounts by citizens of Bharat is about US$2 billion. However, the Central Bureau of Investigation, Bhartiya government agency has gone on record saying the estimated illegal funds of Bhartiya citizens held abroad in tax havens is estimated to be $. 500 billion in its declaration to Bharat’s Supreme Court in July, 2011. Bharat’s black money is estimated to be between 23% to 26% of the GDP according to various estimates. According to the Global Financial Report, during 1948-2008 around $. 213 billion of Bharat’s money is stashed abroad and its market value in 2008 is expected to be $. 463 billion!!!
Bharat has started re- negotiating its tax treaties with other countries for automatic exchange of information to curb illegal funds flow and black money stashed abroad. Whereas the demonetization of the higher denomination currency notes of Rs.500 and Rs.1,000 is precisely aimed at tackling the black money in circulation within the country. Tax experts also expressed opinion saying people who hoard black money will keep only around 6% in the form of cash. The major portion of black money is estimated to be diverted to real estate and gold.
Four major statutory measures
Bharat has introduced Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, and The Benami Transactions (Prohibition) Amendment Act, 2016 which is an amendment of the older Benami Transactions (Prohibition) Act 1988. Bharat has also amended the Prevention of Money Laundering Act and Foreign Exchange Management Act in 2015, that now include a major clause whereby the government can seize and confiscate equivalent asset in Bharat where the asset located abroad cannot be forfeited. Consequent to the passing of these acts, the Bhartiya government had opened a window of opportunity to voluntarily declare the undisclosed incomes under Income Declaration Scheme (IDS) from 1st June, 2016 to 30th September, 2016. This IDS was not an amnesty scheme as it did not give tax exemption but levied applicable tax deductions.
While the Benami Transactions (Prohibition) Amendment Act, 2016 can be used to trace black money investments in properties (real estate) another major area of concern is hoarding of gold. Government has started linking the properties of the owners with their Aadhar cards and this can become handy in identifying benami (i.e., anonymous) owners. The Benami Transactions (prohibition) Amendment Act that has come into effect on 1st November, 2016 will empower the government to even seize and confiscate the properties of benami owners. Government has imposed excise duty on gold and made PAN as mandatory for transactions over Rs.2 Lakhs in order to track the large value investments in gold. This measure is expected to reduce the black money invested in gold. Additionally, government has also introduced Gold Monetization scheme in order to mobilize the gold lying with the people and sell it to the jewelers after converting the same into bullion bars.
Therefore, demonetization is one of the above measures initiated by the Bhartiya government and the next steps in the sequence of the things are- aiming at less cash (not cash less) transactions in the economy- expanding the taxable population (It is expected that the Bhartiya government will in due course introduce taxation with very low tax rates based on the banking transactions once majority of the population open bank accounts and start transacting more through bank money and less in cash) – identify the anonymous owners of properties to confiscate the properties acquired by illegal source of funds and make difficult for the tax evaders to amass wealth illegally in gold.
The above measures are all like dots and the crucial connecting link that joins all these dots is digitization. The Bhartiya government and the Central Bank of the country- Reserve Bank of Bharat are fully aware that achieving total financial inclusion through the brick and mortar model is extremely difficult and also a slow process. This can happen only through a disruptive technology. The answer is BHIM – As on 30th April, 2016 Bharat has 1,034,253,328 mobile connections and ranks at second position in the world (81.35 connections for every 100 people) whereas Bhartiya’s mobile banking share is at an abysmally low level of 0.1% of the total banking. BHIM (Bharat Interface for Money) is a Mobile App developed by National Payments Corporation of India (NPCI), based on the Unified Payment Interface (UPI), which can be used on all mobiles. This technology allows the user to instantly transfer money between the bank accounts of any two parties.
To conclude, the current demonetization done by Bharat is a tip of an iceberg but a first major step towards – less cash economy, total financial inclusion and tax reforms. This is expected to bring greater transparency in the transactions of the economy, reduce avenues for black money and corruption. Whether Bharat will succeed in its endeavor or not, it is for the time to decide. Intention of the Bhartiya government appears to be sincere; however, the key for the success lies in implementation of the grand plan. The events have started slowly unfolding just two months ago (8th November, 2016) and the people of Bharat, particularly the common man has so far responded positively, hoping for the best. This can be gauged by the silent suffering he is undergoing by standing in the queue to withdraw cash from banks and ATMs without protests. One lives on hopes. Let us hope for the best. I only wish Steve Forbes would have made an in depth analysis based on the facts to support his views that the current demonetization is a wrong move rather than sounding rhetoric.
(Ex Senior Banker, Management and Financial Consultant, Visiting faculty at premier B Schools and Universities. Hyderabad, Bharat)
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