Bibek Debroy Terms Demonetisation As Step One To Clean-Up The Indian Economy

NITI Aayog member Dr Bibek Debroy is one of the key supporters of Prime Minister Narendra Modi's demonetisation campaign. He has been valiantly defending the government’s move. Dr Debroy says that it is just the beginning of a clean-up of the entire economic ecosystem. He explains the rationale and the long-term impact of the move in an interview to Firstpost. The notable portions are given below:

Demonetisation will not stop the creation of ‘black income’

Dr Debroy suggested that one should not look at the announcement for demonetisation in isolation but look at it from a broader perspective. He clarified that demonetisation was not meant to address the issue of creation of new black income since there are other instruments to take care of that, like negotiating and renegotiating agreements with Mauritius, the Real Estate Bill among other things. Dr Debroy also reminded the new income declaration scheme, that ended on 30 September, was specifically meant for a greater scrutiny of people who might have had black income.

The criticism regarding the definition of ‘black’ money

Dr Debroy identified two different uses of the aforementioned term. The first type being the money earned through illegal activities such as crime or drugs. The second type of black money is when the income generation is legal but the necessary tax was not paid. Now black money exists in non-cash forms like gold or property, but the existence of a substantial part of this black income is in other forms does not mean that it should not be addressed.

Criticism about cash vs cashless

According to Dr Debroy, no one is expecting the use of cash in India to vanish overnight. But the cash to gross domestic product (GDP) ratio in the country even till last year was 13 per cent. Some 15 years ago it was 9 per cent. It should be understood that when a country develops the use of cash reduces.

Things like the Payment of Wages Act. Section 6 of the Act says you must pay wages in cash unless you have concurrence from the employee not to do so. Why should we have such a rule in this age? It should have been done away with years ago.

Due to Jan Dhan Yojna, there are 260 million accounts and many have RuPay cards. However, many in our country need to be educated and convinced about the other uses of RuPay cards other than ATM transactions.

To those doubting the Jan Dhan figures

In a survey done in August, not by government but by a private institution, stated that 97 to 98 per cent of India’s population – both urban and rural – has bank accounts. Now, all of them may not be using their bank accounts, but they do have bank accounts.

About currency notes getting back in the economy

Dr Debroy stated that most people who were going to deposit it have already done so. The money that is coming into the system has not become white. It will invite taxes and penalties if required and will have deeper scrutiny. Just by being in the banking system does not mean the money is legitimate.

He declared that the demonetisation is beginning of an attempt to clean up the financing of capital market transactions and real estate.

Dr Debroy accepted that there was inconvenience. One was to get enough new notes to banks; two, naturally when there is a shortage there will be rationing. So in this scenario it was decided to take smaller denomination notes to rural areas; and three, it is one thing to get the notes to the bank and it is quite another to take it to ATMs. Hence there was a problem with banks and ATMs.

On benami property and real estate

Dr Debroy believes demonetisation destroyed the black money component in real estate. Once the situation is stable, it will no longer be 50 per cent black and 50 per cent white. All of it (black) may not disappear but the amount will be lesser now. Goods and services tax (GST) will bring a lot more into the net.

On the impact of wider tax base

There will be an increase in indirect taxes because of GST. Dr Debroy believes that in future there will be a greater degree of enforcement with regard to eliminating cash transactions in certain segments.

On the difficult issue of taxing people in rural areas, Dr Debroy stated that taxing agricultural income is a state subject but taxing non-agricultural income of the farmer is not a state subject. So there is a need in broadening the base, but also simultaneously ensuring that tax department, both direct and indirect, does not unnecessarily cause harassment to honest tax payers and he believes that the country will see something on this line in the budget.

On reports of people illegally exchanging money

Dr Debroy stated that there were three problems with banks. First, they were not very vigilant about the functioning of the ATMs. They were talking about whether the ATMs were recalibrated, but the question according to him was, how many ATMs were working? Second, from the second day we knew from newspapers that some bank officials, though most of them worked really hard, connived. How do we know that they connived? Because they have been caught. So there is a positive way also to look at this.

About the third problem, which is shortage of notes there is lack of information.

On the opinion emerging from the world around on demonetisation, with some calling it an ‘immoral act’

According to Dr Debroy, someone who is based abroad does not know what is happening on ground here. They are forming their opinion on what people are writing here in Indian media.

Read the full interview here.