The problem faced by this BJP government viz-a-viz the economy are two- fold. The first is that the revenue coming in from taxes is low and the second is the existence of a parallel economy variously called the black money economy which is purported to be as big as the white economy but does not come under the tax net. With tax revenues being low resources for any activity become scarce and then the government has to start the process of rationing which becomes difficult considering the many competing areas that desperately need funding. Not only that because of the lack of resources big development plans have to be kept in abeyance. As for black money various governments have tried multiple means to check and control it but sadly with little success. The ground situation and the objectives as put out above look good but let us now examine how the present BJP government went about it.
From 2014 there was lot of sabre rattling being done on the populist agenda of bringing back black money from Swiss banks which had seized the public mind. But nothing really happened on it since the Swiss will always stick to their secretive laws and those Indians that have stashed their black money in Swiss and similar tax-friendly havens keep their ears close to the ground and are agile to move their ill-gotten wealth to other locations before even the stodgy Indian tax authorities have made their first move. With no success on the black money issue, the BJP government latched onto the leak of information from banks like UBS and Standard Chartered Bank that claimed some Indians had monies with them. The monies stated in the accounts looked small and included many legitimate accounts opened by individuals and corporate entities with due permissions from RBI. Added to this, there was pressure mounting on Modi's government to deliver on its election promise of transferring Rs 15 Lakhs into each citizen's account upon recovery of the elusive black money. This figure indicates that the BJP government was well aware of the size of the black money hoard abroad. Lately the Basel-based Bank of International Settlements (BIS) has released data which shows that offshore wealth held by Indians in tax havens has surged nearly 90% since 2007 to $62.9 billion (about Rs 4 lakh crore) in 2015-about 3.1% of the country's GDP in 2015, the latest year for which data is available. Also, contrary to popular belief, Switzerland is no longer the preferred destination for this wealth. Over 53% of this Indian wealth is now held closer home in Asian tax havens like Hong Kong, Macau, Singapore, Bahrain and Malaysia. Swiss banks hold 31% of Indian wealth, down from around 58% in 2007.
Thus as you can see Narendra Modi and his government have been firstly, unable to stem the growth of offshore wealth held by Indians since it continued to grow even after 2014, secondly, they have been barking up the wrong tree and thirdly, have painted themselves into a corner with their loud claims to bring back black money.
There was a need therefore to do something drastic that would show that the government was serious about black money. What was there if the black money holdings abroad were getting stuck in procedural wrangles, there was enough opportunity to do something closer home and that was what prompted demonetisation on Nov 8, 2016. The idea was good but the implementation was bad. .
That is where the government commenced State-sponsored financial terrorism on its people to justify their errors. The first assumption in this approach was that all Indians are crooks and none of them pay their income tax correctly. The second assumption was contrary to our judicial system where you are presumed to be innocent until proven guilty, here you were presumed guilty of not paying proper income tax until you proved that you had. In line with this premise the government warned in no uncertain terms to those who were depositing the excess cash they had in the demonetised notes and more than the limit of Rs 50,000 that they would have to define the source of these funds.
Here the amounts were not black money but money caught in the gap while moving from one accounting entity to another and required the consent of the buyer and the seller and could also involve having the say-so of third parties. From that point onwards until today you will find the raucous orchestration from the Finance Minister down to the officials where the recurring theme is - We will get you! In this you would have seen that almost 2 lakh entities who deposited more than Rs 2 lakhs or more are purportedly on the I-T man's radar as reiterated recently to track down the total quantum of Rs 3 lakh crore suspected deposits.
The demonetisation objectives were to catch black money within India as much as possible, to hit out at corruption, combat counterfeiting and make it difficult for counterfeiters to copy the new notes. The black money escaped from the government's hands like water put in a bucket full of holes. Corruption remained unaffected since new funds asked for came in the new currency and the old currency stocks with the corrupt went the escape route for black money. As for counterfeiting within 2 months of the new currency launch of the Rs 500 and Rs 2000 notes, fake notes were seized within the country believed to be made in Pakistan and then in Bangladesh.
This required the new narrative of the cashless economy, the squeezing of availability of high denomination currency and the continued fight against corruption. So the high denomination currency squeeze is happening on its own without the government having to interfere with it. Both cashless operation and a lesser dependency on cash transactions will happen at a slower pace than what Jaitley wants. It is not like closing one tap and opening another which case is the way Jaitley thinks it is since he does not factor the diversity of the country both in economic terms and geographical spread.
One hopes that the government will learn that - There Is Always A Better Way.