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Demonnetisation or demonisation?
Candidate Modi made two promises during his election campaign: to bring back black money stashed abroad and to eliminate corruption.

On the former, the Modi government, under secrecy clauses of the agreements entered into with countries, has not disclosed the quantum of amount brought back.  The growth in income tax revenue during 2015-16 shows that there has been no major spurt so as to indicate some extraneous element that has pushed the growth upwards than normal. But the current year’s disclosure scheme has definitely yielded results:  as much as around Rs 70,000 crore is reported to have been disclosed.

What could be the implications of his big-ticket announcement, demonetisation?  

For this, one has to fall back on the famous Irving Fisher equation, MV=PT. That is, money in circulation (M) multiplied by the velocity of circulation (V) is equal to the price (P) multiplied with total transactions (T).  Suffice to say that when a certain amount of currency is demonetised, the MV portion of the equation is instantaneously affected. Wherever currency is used in transactions including in manufacture and trade, they will come to a standstill for some time. Consequently, value addition shrinks affecting growth in GDP. 

In the real estate sector, black money is not generated just through the sale of the property but by manipulating construction costs. For example: for the approval of a one lakh sq.ft building, the going rate through bribes in Tamil Nadu is Rs 140 per sq.ft. How does a contractor account for this 

under the table payment?  How does he account for speed money payments towards power, water supply, and sewerage connections? He does it by manipulating the cost of construction, during the process of which he makes a neat pile of unaccounted money for himself. This sector is one, which would have suffered the maximum damage due to demonetisation. 

Some large business groups also want large sums of black money to pay the politicians, income tax, and other officials. How do they generate black money? Simple. The company’s Man Friday sets up known friends in business as consultants. These experts are asked to collect cash by whatever means and in turn, are reimbursed on their bills for consultancies provided which is only the collection of money. The consultancy payments appear as legitimate transactions in the books of account of the company, but they receive around 60 per cent back as cash. The ‘consultants’ discharge even income tax and service tax liabilities. This and other similar businesses would have received a death blow.

The Modi administration could have done the following before demonetisation:

It could have demonetised once and for all high denomination notes and introduced say 200 and 300 rupee notes. If somebody has to pay a bribe of Rs 1 crore he has to carry bundles of low denomination notes. By introducing Rs 2000 note, bribery is facilitated.

Before the announcement, the banks should have been asked to double their ATMs in the name of facilitation.

All railway stations, airports, colleges, university campuses, bus stations, post offices, panchayat bhavans, hospitals, large departmental stores, government offices should have been provided with ATMs. In other words, the country should have been saturated with ATMs both in rural and urban areas. 

The refilling of ATM when they get exhausted has been very inefficient even in normal times. The companies doing this work should have got the transportation logic worked out using linear programming techniques. 


What should be the next steps?

The government should eliminate cash transactions through a proper rule under the Income-tax Act. 

The government must announce that the RBI will progressively reduce currency in circulation by a fixed percentage each year.

The Revenue Department should set up an audit wing directly under the Revenue Secretary consisting of top auditors to carry out surprise inspections of assessments disposed of by the tax authorities.

The law should be amended to provide for the summary punishment of officers found irresponsible in assessment procedures. Similar amendments should be carried out in the AIS service rules of the IAS, IPS, IFS and Indian Forest Service officers to be summarily put under suspension. 

Ad hoc tribunals should be set up to try these cases and disposed of within a year.

The people of India want a progressive, prosperous and just society that takes care of its millions. They do not want a society resplendent with the spreading cancer of corruption and injustice, and the continuance of a dishonest system where there is neither justice nor integrity.

– M R Sivaraman, Former Revenue Secretary and former Executive Director, International Monetary Fund

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