It finally took the Supreme Court's intervention for the government to concede that they may have overestimated the efficacy of demonetisation to curb black money. Responding to the Supreme Court's queries based on multiple public interest litigations filed by various lawyers and citizen groups, Attorney General Mukul Rohatgi told the country's top court on Friday that deposits of around Rs 12 lakh crore have come back into the banking system. Rohatgi said that this amount is higher than the government's own estimate which was not quantified. The AG said that the government expects further deposits of around Rs 1 lakh crore before the December 30 deadline.
Rohatgi expressed confidence in the issue getting resolved in the next 10-15 days and said that all necessary steps to ease the inconvenience on the public were taken.
Rohatgi also assured the SC that Rs 4 lakh crore worth new notes have been printed. About Rs 3.5 lakh crore notes of Rs 500 and Rs 2,000 denomination have been pumped back into the banking system. This suggests that the government is a long way off to replacing all the notes in the system as 86% of the total money demonetised amounts to nearly Rs 15 lakh crore.
The petitioners also pointed out that while the RBI has mandated banks to provide each depositor a weekly withdrawal limit of Rs 24,000, in practice the banks are unable to meet that demand. Chief Justice TS Thakur sought a clarification on why this limit was not being met despite assurances given by the government earlier. Former Finance Minister P Chidambaram who was also present in the court said that the RBI's printing presses have the capacity to print only 3 billion notes per month and hence the exercise to replace each note is likely to take 6 months to complete.
Rohatgi's fresh statement in the apex court assumes significance as on November 15, the AG had expressed confidence of Rs 4-5 lakh crore getting wiped out due to demonetisation. But with his fresh admission of Rs 13 lakh crore finally emerging back in the system, less than Rs 2 lakh crore is likely to be the quantum of black money that the government may have succeeded in flushing out via demonetisation.
But there is a transaction cost due to the disruption caused by demonetisation that cannot be ignored. The Centre of Monitoring Indian Economy has estimated this transaction cost to be around Rs 1.28 lakh crore. Of this, the government and RBI are estimated to bear a cost of Rs 16,800 crore. This is largely on account of printing of new currency and transportation of new currency to bank branches, ATMs and post offices. The industry is likely to take the biggest hit of over Rs 61,000 crore on account of loss of business.
The government is now expecting that the Income Tax Dept will do its job properly. This report points out how the enormity of the job has already dawned upon Income Tax officials who have written to the Prime Minister complaining about being 'demotivated' due to lack of infrastructure and adequate manpower to probe an avalanche of fake deposits. How the government plans to motivate an already burdened IT dept to go after black money hoarders who have used innovative methods to launder their cash is still not clear.
News agency IANS reports that the government is pinning its hopes on the fresh Income disclosure scheme launched on November 28, called Pradhan Mantri Garib Kalyan Yojana. Generous calculations by analysts expect a declaration of Rs 1.5 lakh crore under IDS, resulting in a tax bounty of Rs 75,000 cr (at 50% tax). But looking at the transaction cost of Rs 1.28 lakh crore that the country will have to face in the present quarter, the demonetisation exercise is likely to be a loss on a net basis.
This is not all. The RBI has already revised FY17 GDP by 50 basis points to 7.1% from 7.6%. This is being seen as a very conservative estimate and the virtual standstill seen across the country in various sectors does suggest that the GDP loss is likely to be higher. Even a one-per cent hit on the GDP means a loss of Rs 1.5 lakh crore, which negates any possible gain that the government hopes to make through higher tax penalties and bringing in more people into the tax net.
The government also made several announcements on Thursday, giving tax exemptions to those who do online transactions in a bid to push digital economy. This also means a loss to the government though the actual outgo will only be known once the indirect tax numbers are presented in the budget early next year. Either ways with less than 5-6% of the population using debit, credit cards and e-wallets, the entire process of demonetisation to push more people towards a cashless society seems to be a futile exercise.
According to a Reuters report, PM Modi has staked his reputation and popularity on the move. Revenue Secretary Hasmukh Adhia along with a small group of officials were the only people in the government who were in the know. While this was done with the intention to avoid any possible leaks, the subsequent disaster in the implementation does suggest that the secrecy failed to prevent black money hoarders from pushing their money back into the system. Meanwhile, the average citizen appear to be taking the entire brunt of this poorly planned war against black money.
Incidentally, the Supreme Court did ask Attorney General about the issue of secrecy. “When you made the policy on demonetisation, was it confidential?” the court asked.
And it appears to be so. "I have done all the research and, if it fails, then I am to blame," Prime Minister Modi told a cabinet meeting on November 8, shortly before the move was announced, according to three ministers who attended, reported Reuters.
The Supreme Court has posted the next date for hearing the petitions on December 14.