Demonetisation was undoubtedly a big shock and a surprise. Suddenly 86 per cent of our currency ceased to be legal tender, a development never witnessed before in any modern economy. The reason was to drive black money out of circulation.
For the last 40 years and more India has grappled with the issue of tax-evaded money, popularly known as black money. Many schemes had been tried with limited success. Black money is held in many assets—cash, gold, property and overseas assets. There have been many estimates of black money from 40 per cent of GDP to 20 per cent, but all admitted its existence in a large quantum. Governments passed many draconian laws to tackle this, but evaders laughed merrily to the bank and carried on. But never before was such a radical step tried.
Now, one year from that date, what is the impact, was it the right decision? Yes, many people suffered due to lack of currency, many spent time in queues, there was a certain disruption of economic activity and there was a negative impact on people for a while. Yet the poor bore it well as they believed it was a fight against tax evaders and looters, the middle-class supported it for the same reason. The leftist malcontents tried to blow it up and failed miserably. If people were upset there would have been riots in many places in a country where a small spark can often lead to riots.
Why was there so much of broad-based support from people? Indians were fed up with successive governments failing to tackle this menace. Successive governments created a system which rewarded tax evaders, smugglers, black marketers and many politicians, and political parties shared in the spoils because they needed black money for elections. Crony capitalists flourished because they could buy their way out. They were great risk takers, all with money from the banks never their own. They knew their political friends would bail them out when they got into trouble. Cronies became richer, the ordinary honest citizens suffered. India discriminated against the great majority of its people who were honest taxpayers and watched in dismay as tax evaders became richer, openly enjoyed an ostentatious lifestyle. They seemed to be above the law, too.
T.V.Mohandas Pai
Has demonetisation achieved its aim of exposing and prosecuting tax evaders. Well, black money held as cash has come back to the banking system. The government knows who made the deposits, where, and is now launching prosecution in very many cases. We need to wait for the results. Benami property holders are under scrutiny, overseas assets holders are being investigated. But income tax collections are up, many more people have filed returns and there is increased compliance. However, the larger benefit has been a change in the behaviour of tax evaders. Use of black money in real estate, trading and gold has come down. Prices in real estate have come down with the market turning sluggish as it is no longer a sink of black money. The impact is visible in cities with heavy concentration of black money like Delhi. Most people who dealt in black money seem to have reduced such transactions.
There is a distinct change in attitudes, behaviour and transactions of the tax-evading class. To my mind this is the biggest transformation and economic benefit, as demonetisation has achieved what many failed laws could not achieve—change in behaviour! A booming stock market, led by heavy inflow of Indian capital is rewarding good corporates. Cronies are getting punished as investors know they are on the way to bankruptcy.
Honest tax payers who bore the pain stoically are now convinced that finally government will respect and reward honesty and prosecute vigorously the tax evaders and enforce the rule of law. The benefit of demonetisation will be more visible in the future. Reforms in political funding will hopefully drive black money out. The GST will further expose tax evaders and transform India into a nation of honest tax payers and law abiding citizens.
India has changed! The shock of demonetisation was needed to bring about a behavioural change.
(The author is Chairman, Manipal Global Education. Views expressed are personal)
