-Damiloju F. Oyekan-
A friend of mine who works with Indian Railway Authorities noticed a surge in ticket booking for the fastest distances possible. Though an immigrant, he probably would have examined the situation as one of those where IRA revenues saw a free-ride, sky rocketing to an altitude- all high, he probably could not explain. What about those who did not just listened to the telecast that evening, but also understood “laws of unintended consequences” ?
Simply put, demonetisation is a legal discontinuation of an existing legal-tender. Often, demonetisation is followed by monetisation, with the sole aim of replacing currencies which have lost their “legal-tender” identity. This is however not strange as some countries in Europe demonetised their individual currencies prior to the monetisation of the “Euro”, so also did India in January 1946,1954 and January 1978.
The giant of Africa, in 1984 incurred demonetisation under the military rule of General Muhammadu Buhari, primarily to raise a standard for the black money which crumbled the economic state of the nation. Two centuries ago, the United States demonetised silver and monetised gold as the recognised medium of exchange. Her economy shrunk, leading the country into depression. The remonetisation of the silver helped reposition the economy and bridged the gap for the flow of money.*
In an unscheduled evening address on November 8, 2016, Prime Minister Narendra Modi, took the bold step of relieving Rs 500 and Rs 1000 of their “legal-tender” identity. PM Modi announced monetisation of Rs 500 and Rs 2000. this the colleagues of demonetised currencies such as Rs 5, Rs 10 , Rs 20, Rs 50 and Rs 100 in the league of India’s Financial system. According to PM Modi, his declaration was a war against the parallel economy, terrorism and corruption, three canker-worms strong enough to relieve any “glorious” economy off her title.
Black or “tainted” money otherwise known as INCOME IMMUNO TAXATION (IIT) can be explained as money earned outside the recognised or legalised economic-activity of a state, which may not only find it’s way into the lane of it’s “white” counterpart, but remain untaxed. This volume of black cash is ploughed back into the illicit “unrecognised” economic activities or converted to “white money” by laundering. Other causes of IIT are; smuggling and a tax system that is not only complex, but does not reward hard work and productivity. India’s tax system might have as well contributed to the creation and growth of a parallel economy because her tax system does not go in consonance with the standards outlined by Adams Smith in his “Cannons of Taxation”.
Smugglers get no soft landing, this can be attributed to why they build an enabling environment by aligning with the political system. In recent time, it has even found its way into the league if huge enterprises.
Weapons of war are not sold without a price. Owing to this, political activities also nurture this “cancer” inadvertently. Because of the chunk of cash required to run political campaigns, politicians require donors to fund and promote their electioneering activities. This “sponsorship” which initially may be free at the time of donation eventually turns into contrition, when the donor begins to demand something in return, should the politician emerge victorious at the polls.
Since IIT are not accounted for, we probably could estimate the chunk of tax, which rather than sitting in the vaults of the government are moving to and fro unnoticed. With domestic IIT close to INR 14,958 crore (million) unaccounted and $1.4trillion brazenly ensconcing the four walls of swiss accounts, we can do the calculations, tax receivable will exceed a hundred and twenty crore. Such a huge sum, Indians are in the best position to tell us how many hospitals, kilometres of road, schools and social security this sum can provide, if government were to fulfil her Marco economic obligations.
It will be unfair to say India has not fought this anomaly in recent times. PM Modi’s sudden and firm action on IIT is not the India’s first attempt. To name a few ; the demonetisation of 1000 rupees and 10,000 rupees and monetisation of 1000, 5000 and 10,000 rupees in 1946 and 1954 respectively, the “demonetisation” of currencies “monetised” in 1954, The Wanchoo Committee (1975) , which though seemingly progressive, was silent on simplifying tax laws, a major contributor to tax avoidance and evasion. That same year, Voluntary Disclosure Scheme (VDS) was launched which basically pardoned voluntary disclosure of black cash. In 1977, Direct Tax Laws Committee was launched to cover the inefficiencies of the Wanchoo Committee simplification of tax laws. Three years after, the Dangli Committee was inaugurated. In its first year it had a view to make black money productive, a ten year bond with a face-value of Rs 10,000 being introduced. Investors whose source of wealth compromised India’s business and financial laws were given immunity from prosecution.
Among the many who commended PM Modi’s acclaimed “clamp-down” are Mukesh Aghi (President, US India Business Council ) , Global Organisation of People of India Origin (GOPIO) during a meeting a Paris, Canada Unit of the Overseas Friend of BJP. In their assessment, it was a bold step which they addressed as, “Thinking the unthinkable”. Also, the famous Indian wrestler Dalip Singh Rana, with ring-name “The Great Khali” greatly commended PM Modi’s moves.
Meanwhile, this move suffered a great scorn from India’s Legislative arms “Rajya Sabha” and “Lok Sabha” due the timing of the policy, PM Modi’s prior inability to address the House which was preceded by a privy release of the information to friends and associates and the very long queues at the AT Machines, to mention a few. After lashing PM Modi and further seeking probe by a Joint Parliamentary Committee” on alleged selective leak of information before the official pronouncement on November 8, 2016, pushed by Deputy Opposition Leader, Anand Sharma (RS). There were also allegations during this 420 minutes heated debate that ended inconclusively as to why PM Modi will not honour precedence. In 2013, Leader of Opposition demanded PM (Dr) Manmohan Singh appear in the House. PM Manmohan not only came, he sat and listened. The November 20 rally held for Modi’s Lok Sabha elections, according to the International Monetary Watch estimated Rs 23,000 expended. this rally which was organised at Ghazipur in Uttar Padesh by PM Modi. Raijya Sabha questioned the mode of funding, if truly PM Modi was true to his announcement on November 8.
Rare it is, to find a leader of a state risking his political goodwill for the economic advancement of the state. While it seemed that PM Modi led administration did not do their “home-work” prior to implementation ‘due to the four lakh people who lost their jobs as leaders of top three sectors in charge of India’s exports, it is however not new. As i often attest, economic policies do not benefit everyone, there will be losers and on the other side, the gainers.
The long queues at ATMachines is not just a waste of time and energy, but also affecting the productivity of the indian economy in the short run. The journey to cashless economy is gradual, especially for a developing economy. The government having made provisions for ATMachines can be sure to experience breakdown due to the continuous usage at a time like this. Some banks even extended their opening hours to 6pm. Technicians on ground to fix ATMachines that may out-perform in this short-term and Online transaction awareness by banks will do a lot in not frustrating this policy. Demand for credit and debit card transactions will increase, reducing the Cash on Delivery (COD) and also demand of Point of Sale (POS)machines. Online trading stores would not be left out as the gainers, those who cannot switch to the pace of the tide, may be the losers and in-no-time be out of sight.
On selective leakage of information, we must first understand the following ; indians who have cash in Swiss Banks, cash invested in bullion, gold and forex, that there was selective leak of information prior to the November 8 announcement is a mockery of demonetization and the financial system in its entirety. This is because any individual who was privy to the information before its official release would find a sure means to secure the value of their wealth before its implementation. Deputy Opposition Leader enlightened the House that the State Bank of India knew of the policy since March. He added that a Gujarati Newspaper back in April published a report on the proposal. He conclusively sought that an investigation be launched into how many individuals bought more than Rs1 crore at forex and bullion. With cash stashed in tax haven especially on account of prior notification, a good number of the targets are secured leaving the masses to the pinch. It can be likened to an attempt to kill a crocodile in a river only to inadvertently attack the fishes, because the former is amphibian. This does not however rule out the fact that offenders found wanting would be caught unawares.
Black money has gone from being kept in cash to being made legitimate. This ordinarily defeats the credibility of demonetisation, owing to the Fact that the target itself is already off-target. The monetization of Rs 2000 may also be defeating the purpose PM Modi seeks to achieve. In the long run, apart from the cost that will be incurred in monetization, Rs 2000 may be another invitation of this ugly menace yet again. If Rs notes increases by 109% between 2011 and 2016, we can do the simple arithmetic to arrive at the fate and rate of Rs 2000 in year 2020.
Those in possession of “tainted” money have one fear, disclosing their source of wealth. Situations such like having several bank accounts to lodge this cash might be a good option. In Nigeria, the Bank Verification Number (BVN) might make such impossible. This gives rise to hiring individuals to deposit the funds in bits to different banks, attracting commission to the volunteer. How many of such volunteers they can access becomes another problem. Confidentiality of these volunteers raises it’s beautiful head again as another set-back.
Also, is the frontal attack on the “inconsistency” of daily withdrawals per person from an ATMachine, this poses as a signal of looming fiasco. Initially, it stood at Rs 4000 from 8 – 13th November, but was later increased to Rs 4500 between 14th and 17th November and a later reduction to as low as Rs 2000 from 18th November might be perceived as miscalculation or effects of first time surgery by a surgeon. Another selling point is the tenuous suspension of toll collections on all national highways which shifted from 11th November, 14th, 18th November and now till 2nd of December. This is not debatable as regards the short term contraction that will befall the transport sector. Opposition must however, not shy away from the inadequacies that are obtainable at the early stage of a policy. But, if this is not India’s first, why the lapses ? Did we not learn from ourselves and neighbouring nations?
One step I must commend is the permission to use banned currencies to pay taxes. It can be likened to using a single stone to kill two birds.
Germany and United States have perhaps demonstrated by example, although “controversial” in application, how to bridge fiscal deficit. Theoretically, high taxation increases government revenue. President-Elect of the United States of America, Donald Trump, during his campaign, called for tax-cuts, in order to keep jobs in America and for Americans. From afar, anyone can conclude that Mr. Trump, who is also a billionaire, wants to create a thriving atmosphere for his business and colleagues. On a critical look, one will see that it is a political stunt pulled to garner support. If i must say, it was one of the many propagandas that earned him the seat.
Hypothetically an economy “X” consisting of the three categories of citizens; the upper, middle and lower class with an annual income of 350,250,50 crore annually. Tax rates of 45% , 35% and 20% being “progressively” distributed, as orthodox economics preaches will amount to 255 crore receivable by the government annually. Should after collection, the actual amount received totalled 150 crore, it leaves 105 crore evaded and thus unaccounted. High tax rates achieve primarily three aims; discourage new business, evasion of taxes and contraction of existing business. Even the history of taxes teaches us that the burden of tax is shifted to the final consumer. Ronald Reagan and Margaret Thatcher understood it better. If flat taxes of 20% were introduced in economy “X” the following year, it amounts to 130 crore receivable by the government. This is a cut. Start-ups will increase, Foreign Investment will improve, the “tax-evasion” syndrome will gradually phase out of the tax system because the tax-rates do not hurt their production process. If an economy does not have any mode of maintaining high taxes without recording half the sum as evaded, a reduction is advised till she can maintain high tax rates compliance. Final consumers have access to affordable commodities and services, employment figures sees this as an observable downward movement then existing production lines can expand. Estonia and Lativia are towing this path, the intended consequence was an increase in tax revenue. This week PM Modi met with Economists so as to streamline the policy, we hope their contributions will benefit indians today, tomorrow and beyond.
Damiloju F. Oyekan is a graduate of Economics, a product University of Ilorin and an intending Youth Corps Member. He can be reached via
Mobile Number : +234 80 6152 8217
Twitter : @damilojuoyekan
Instagram : @damilojuoyekan
Email : email@example.com