Key ramifications of note ban

There are five takeaways from the developments since the announcement of demonetisation on November 8 by Prime Minister Narendra Modi

Not taking main Opposition parties on board is proving costly: President Pranab Mukherjee regretted how some members of Parliament stalled any debate in either of the Houses by disrupting their proceedings. No discussion on demonetisation could take place in Parliament. Barring a couple of money bills, no other major legislative business could be conducted. The fate of the goods and services tax (GST) bills seems to be in limbo, raising doubts as to whether the target of rolling out the new indirect taxes system by April 2017 will be met.

Could the government have avoided the stalemate? Perhaps taking the Opposition political parties into confidence just before announcing the demonetisation decision could have helped. The National Front government of V P Singh had consulted the Opposition parties including the Bharatiya Janata Party (BJP) before imposing a 25 per cent surcharge on petroleum product prices in the wake of higher crude oil prices following the Gulf War in 1990. Indeed, it had excluded cooking gas from the surcharge after suggestions to that effect from the BJP and the painful decision on a steep hike got implemented without any political disruption. Prime Minister Narendra Modi could have tried a similar ploy. By not exploring that option, it could be argued that he is now paying a political price that could upset the GST timeline. Exaggerated expectations of gains: It is by now clear that demonetisation would flush out only a relatively small portion of the stock of black money kept in cash. Over three-fourths of the demonetised currency notes have already been returned and more should flow back in the few weeks ahead. The new tax laws immunity scheme will encourage more people hoarding black money to come forward with their declarations and this would help the government claim some credit. But expectations of “neutralising” an estimated ~4-5 lakh crore of currency notes were exaggerated. And the government’s plan to use the “neutralised” cash for helping the poor also has come unstuck, particularly after the central bank has clarified that no such gains will materialise until its liability on account of these notes is extinguished through a demonetisation law. Rise of the informal credit delivery system: So far, only a fourth of the demonetised currency has flowed back into the system through withdrawals of money from banks, resulting in a serious cash crunch. While many people are embracing electronic payments to overcome the cash shortage, an informal credit delivery system has also sprung up particularly in the unorganised sector in villages, towns and cities. How the informal credit delivery system grows or gets gradually replaced by the online payment options should be closely watched as this would depend on how the electronic wallet companies can spread their networks. Discounts and tax inspectors gaining ascendancy: The government has rolled out several incentives for adoption of electronic payment methods by merchants and consumers. These incentives are in the form of discounts and tax relief. While these incentives may work, the fear is that they might distort the tax system at a time the government is trying to free it from exemptions and sector-specific reliefs. Worse, phasing out discounts and concessions might become difficult as people get used to them. There is also the additional fear over the rise of the tax inspector raj. Shift in focus to promote cashless transactions may weaken resolve to strike at the root causes of black money: This probably is the biggest challenge. The fight against black money cannot be over unless the government initiates follow-up steps like those to reduce stamp duty for real estate transactions, bring circle rates on a par with market prices for land and properties, enforce disclosure of all donations received by political parties, bring political parties under the ambit of the right to information law, roll out GST and reduce exemptions as also the tax rates.