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Last week, the an­nual RBI re­port came as a ver­dict on one of the defin­ing acts of the Naren­dra Modi gov­ern­ment—de­mon­eti­sa­tion—and the great In­dian money count that fol­lowed. The re­sults of ex­tin­guish­ing 86 per cent of In­dia’s cur­rency, be­lat­edly an­nounced af­ter 22 months, we now know, are un­der­whelm­ing. Over 99 per cent of the Rs 15.3 lakh crore worth of can­celled bank notes are back in the bank­ing sys­tem.

Till the gov­ern­ment es­tab­lishes oth­er­wise, there is no black money, since all the money came back. We know that this is not true. At that time, there was talk of Rs 3 lakh crore not com­ing back, which would have been a wind­fall for the cen­tral gov­ern­ment. Now the gov­ern­ment has set it­self up for the hu­mon­gous task of dis­cov­er­ing how much of this money in the bank­ing sys­tem was black money. What Prime Min­is­ter Modi did not bar­gain for is the in­ge­nu­ity of the In­dian mind and the ve­nal­ity of the bank­ing sys­tem. This is the time to eval­u­ate whether his au­da­cious, some say reck­less, act ben­e­fit­ted the coun­try or not.

The RBI re­port re­opened old wounds and brought back mem­o­ries of the trauma the In­dian econ­omy was sub­jected to on Novem­ber 8, 2016, with heart­break­ing sto­ries of per­sonal hard­ship, end­less queues out­side banks, jobs dis­ap­pear­ing, es­pe­cially in agri­cul­ture and the in­for­mal sec­tor where most of In­dia is em­ployed.

The gov­ern­ment is for­tu­nate that In­di­ans, par­tic­u­larly the de­prived, have a high thresh­old of suf­fer­ing. In any other cash-dom­i­nated econ­omy, such a se­vere measure would have trig­gered ri­ots.

At the time of the an­nounce­ment of de­mon­eti­sa­tion, three ob­jec­tives were de­clared—elim­i­nat­ing black money, de­tect­ing fake cur­rency and block­ing the fund­ing of ter­ror­ism. The prover­bial killing of many birds with one stone.

Un­for­tu­nately, the birds are still fly­ing. The al­leged black money is now sup­pos­edly in the banks, but is yet to be iden­ti­fied; since all the money came back, the ex­is­tence of fake cur­rency is a mys­tery. There seems to be no re­duc­tion in ter­ror­ism, and there is more money in cir­cu­la­tion than be­fore, mak­ing digi­ti­sa­tion claims quite hol­low.

To be fair to PM Modi, since he was swept into of­fice in 2014 on the promise of good gov­er­nance and a crack­down on cor­rup­tion, he has made a con­certed ef­fort to com­bat the long-stand­ing men­ace of black money. It may seem tempt­ing to dis­miss de­mon­eti­sa­tion as a capri­cious act but peo­ple who have known the prime min­is­ter in­ti­mately tell me that noth­ing he does is ever un­planned. His ac­tions may seem ran­dom, but later you fig­ure they were all part of a larger plan. And so it was with de­mon­eti­sa­tion. He con­sti­tuted a Spe­cial In­ves­ti­ga­tion Team, in­tro­duced the Be­nami Trans­ac­tions (Pro­hi­bi­tion) Amend­ment Act to curb black money, rene­go­ti­ated tax treaties and in­for­ma­tion ex­change agree­ments with tax havens like Cyprus, Sin­ga­pore and Mau­ri­tius to pre­vent money from be­ing stashed over­seas and floated an in­come dec­la­ra­tion scheme to chan­nelise black money back into the sys­tem. De­mon­eti­sa­tion was to have de­liv­ered the coup de grace to the black money mon­ster.

Also, we must not for­get that Modi is a politi­cian. Be­sides all the eco­nomic jus­ti­fi­ca­tions for this ac­tion, de­mon­eti­sa­tion was also a po­lit­i­cal act. A sig­nal that he was go­ing af­ter the ill­got­ten gains of the rich for the ben­e­fit of the poor. It worked for a while, as was ev­i­dent in the mas­sive vic­tory in the Ut­tar Pradesh assem­bly elec­tions four months later.

In the mul­ti­ple schemes launched by the gov­ern­ment, it re­cov­ered Rs 44,000 crore of black money, and height­ened tax com­pli­ance. A very com­mend­able ef­fort. But was the pain worth the gain? The jury is still out on that.

Our cover story, De­mon in the De­tail, put to­gether by Deputy Ed­i­tor M.G. Arun and Se­nior Ed­i­tor Sh­weta Punj, looks at the road ahead af­ter de­mon­eti­sa­tion and the war against black money. We also have a panel of five econ­o­mists ex­perts weigh­ing in on this is­sue.

Now it is dawn­ing on ev­ery­one that the war against il­le­gal money is a long process and not episodic. Now that all the dust has set­tled on the is­sue, a sil­ver lin­ing has emerged. The di­rect tax payer base has in­creased from 40 mil­lion to 67.5 mil­lion.

In­dia is no­to­ri­ous for its non-com­pli­ance on pay­ing taxes. Can you imag­ine, we have only about 60,000 in­di­vid­u­als with a gross in­come of over Rs 1 crore? Con­sid­er­ing the con­spic­u­ous con­sump­tion one sees all around, there is still a lot of work the gov­ern­ment has to do to make an hon­est na­tion of us. No other gov­ern­ment in the past has made such a de­ter­mined ef­fort to tar­get black money. The ba­sic flaw in the gov­ern­ment's ap­proach is that all its ef­forts are to­wards re­duc­ing the sup­ply of black money; it has done pre­cious lit­tle to re­duce the de­mand for black money by the cor­rupt. It can only be done by liv­ing up to the promise of min­i­mum gov­ern­ment, which the NDA gov­ern­ment has not de­liv­ered. No won­der the new black money is back.

The gov­ern­ment is also on the trail of ex­tremely high value de­posits in 1.8 mil­lion bank ac­counts made soon af­ter Novem­ber 2016. In­come tax no­tices have been sent to over 300,000 per­sons who had de­posited over Rs 10 lakh in their bank ac­counts but had not filed their re­turns. The gov­ern­ment needs to de­ploy Ar­ti­fi­cial In­tel­li­gence-based tools to track the money trails to these high-value de­posits and iden­tify black money. It needs to do this with­out ter­ror­is­ing peo­ple or slow­ing down the econ­omy. In other words, gain with­out caus­ing any more pain.

In the end, like most changes in In­dia, we might just blun­der into bril­liance, even­tu­ally.

Our De­cem­ber 5, 2016, cover

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