Shun populism

Investing more in infrastructure is better than transferring cash

Estimates differ on the value of the demonetised currency notes that eventually might not surface by December 30, the last date for banks to accept old notes with denominations of ~500 and ~1,000. The government had earlier told the Supreme Court that an estimated ~4-5 lakh crore might be “neutralised” at the end of the demonetisation exercise. This would have been as much as 25-30 per cent of the total value of the high-denomination currency notes that were in circulation before demonetisation. However, there is now reason to question that assessment. The value of the currency notes returned to banks is estimated at ~9.85 lakh crore. Even if the pace of deposits in the next four weeks of the scheme slows a bit, it is reasonable to conclude that the government may have overestimated the value of the currency notes to be neutralised. For the government, this may prove to be a costly error of calculation.

Quite apart from raising questions about the efficacy of the assault demonetisation actually unleashed on black money, it could also upset a reported government plan to put more money in the bank accounts of the poor. The plan is reportedly based on the assumption that neutralisation of demonetised currency will reduce the central bank’s liabilities. The central bank’s gains arising out of this reduction in liabilities could be transferred to the government in the form of higher dividend and the government could use it for paying out cash to the poor. A convenient way to implement such a plan is said to be a transfer of a fixed amount to holders of the Jan Dhan Yojana accounts opened in the past several months. This plan, however, may come unstuck if the value of the demonetised currency that eventually is neutralised is much lower than the government’s earlier estimates. But even if such estimates do not go awry, the government would be strongly advised not to pursue such a plan.

Of course, the government will be within its sovereign rights if it were to transfer the financial gains from neutralised currency notes to bank accounts of the poor as indicated by Prime Minister Narendra Modi at a rally in Moradabad on Saturday. But doing so will not be a wise move as it can only provide one-off benefits without creating a sustainable framework for building the capacity of the poor to improve their earnings and standards of living. Instead, the government should use any additional funds for building basic infrastructure. In the past two years, the government has increased allocations for capital expenditure, but the economy could do with more such investments. The private sector is still quite anaemic and the banking sector continues to be burdened with huge non-performing assets. The task of reviving growth through higher investments, therefore, must be undertaken by the government. Mr Modi will soon announce the details of the proposed Garib Kalyan Yojana to be rolled out with the resources that the government hopes to collect by way of taxes through a new immunity scheme for those who declare their deposits of demonetised currency notes as black money. It is to be hoped that this Yojana focuses only on creating infrastructure and eschews transferring cash to the bank accounts of the poor.