It’s a major structural change

India is one of the few economies in the world which has been excessively cash-dominated. A cash-dominated economy has several features, the most obvious being that the percentage of cash currency in circulation in relation to GDP is very high. In India, it was between 12 and 12.5 per cent; 86 per cent of this currency was high denominational — ₹500 and ₹1000.

The obvious consequence of this is a tendency and an encouragement to deal more in cash. Cash becomes the lubricant and the instrument of exchange. What did this excessive cash in the system create in the Indian economy? The size of the shadow economy became much larger over the decades.

Could anyone buy property in India and not pay partly in cash and partly in cheque? To do business, people maintained two sets of accounts. Sales across the counter were taking place without receipts.

This, in turn, would naturally lead to evasion of both direct and indirect taxes.

Of course, it would also lead to economic activity. But this informal economic activity would be outside the formal order. The net result has been that the size of the formal economy contracted and that of the shadow economy became much larger.

Cash also has social consequences. It leads to corruption. The instrument of bribery is always cash. Cash leads to expenditure on conspicuous items like gold and luxury items. Cash is also the instrument for fuelling crime, extortion. Terrorism thrives on cash. And, therefore, in the larger national and public interest as also for good economic reasons, the quantum of cash in the society and the economy has to be curbed.

Analysts and thinkers the world across have done research on what the cost of cash is and what the curse of cash can be. In this context, ever since the NDA government under Mr Narendra Modi assumed charge, we were very clear that the menace of black money is to be attacked. Look at the series of decisions we have taken so far.

In 2011, the Supreme Court had asked the Government to appoint a Special Investigation Team (SIT) headed by two retired judges. The then Government did not do so. We did it.

Immediately thereafter, we came up with a scheme that those who have illegal money and assets abroad must bring them back on payment of 60 per cent tax and penalty or they will be prosecuted. The Black Money Law for overseas assets was enacted and it provided for a 10-year punishment.

We then started entering into agreements with countries across the world through G20, the FATCA agreement with the US to improve international tax compliance through mutual assistance in tax matters, agreement with Switzerland so that we can get real-time information with regard to transactions done by Indians overseas and vice-versa. Three major international double tax avoidance treaties with Mauritius, Cyprus and Singapore have been rewritten.

We then brought in the Benami law which brings into its ambit businessmen and politicians alike and applies to shell companies through which money is laundered. We brought in the income disclosure scheme to disclose income which has escaped assessment. Finally, on November 8, 2016, the Government took the historic decision of demonetising the ₹500 and ₹1000 notes.

There were three major objectives and some incidental achievements. The first, of course, was that the quantum of cash should be curbed. The situation now is that the amount of currency available in the market, particularly high denominational currency, has been squeezed by about 30 per cent. I hope it continues to be squeezed. The number of digital transactions — people using cards, people using e-wallets, people using electronic modes of payments — has multiplied.

The number of individuals paying tax and filing assessments has significantly increased.

An incidental advantage that we have seen is that freezing of funds of terrorists operating in Jammu and Kashmir and Chhattisgarh has taken place. The nature of protests there which depended on large economic resources has altered.

Some people confuse the fact that money in circulation came back into the banks. It had to. That was the objective of the demonetisation exercise. Cash currency is bearer money without the name of the owner.

A currency note is a bearer document. Its ownership is anonymous. The moment it gets deposited in the bank account, it gets identified with the owner. The onus is now on the owner to show that the acquisition of such a large amount of money was legitimate or otherwise. And under Operation Clean Money, we have been able to identify through data mining 1.8 million people who made deposits disproportionate to their known sources of income.

Therefore, the net effect of this whole exercise has been that a message has gone home loud and clear that it is neither fair nor in the larger national interest, but to the contrary, it is dangerous to deal excessively in large amounts of cash. You will be held accountable. And people have responded well. By nudging this process, we are gradually increasing the tax-base size. Our import transactions have started coming in the tax net.

Additionally, we have taken other measures. There are curbs on expenditure. You need to have your PAN card if you want to spend beyond a limit. Cash transactions beyond a particular limit are not permitted. The GST chain itself makes generation of cash quite difficult.

At the end of the day, if India aspires to be a developed country, and we are today one of the fastest growing large countries in the world, we really need a large formal economy. Payment of taxes, dealing within the official structure is a part of patriotic duty.

The state needs resources for defence, development and uplift of the poor. Therefore, it is the responsibility of every citizen to cooperate with the Government. That is why I think this is one of the major structural changes — that we gave a nudge to the Indian economy in this direction.

How does it impact GDP and growth? Obviously, a step like demonetisation brings a transient interruption in money supply. But in the Indian case, the process of remonetisation has been quick. Therefore, by April 2017, we had substantially completed the remonetisation exercise.

We were always conscious of the fact that when you execute a major structural change, for a transient period — a quarter or two — there would be some marginal impact on the GDP which our economy has the capacity to absorb. But in the medium and long term, bringing about a different culture of how India and Indians manage and spend their money, I believe it is a much larger gain.

Finally, I believe that this was one decision taken for a larger national benefit to try and introduce greater ethics into India’s public life. And therefore, it has been and will always be a move that will continue to be supported by the people of this country.

As told to Poornima Joshi