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Analysis

Demonetisation: Most reactionary and illogical policy ever

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(‘Note-Bandi: Demonetisation and India’s Elusive Chase for Black Money’ is an upcoming book from Oxford University Press dedicated to the “memory of Indian citizens who lost their lives due to demonetisation”). Excerpts from the preface by R. Ramakumar.

‘Demonetisation’– the withdrawal of legal tender status of notes of denomination Rs 500 and Rs 1,000 — announced by India’s Prime Minister Narendra Modi over a televised address on 8 November 2016 will go down in history as one of the most reactionary and illogical economic policies ever attempted in independent India.

It crippled an economy that ran on cash and was plagued by a slowdown; it destroyed the livelihoods of millions of farmers, workers, traders, women and the elderly; and it violated the dignity and liberty of law-abiding citizens.

Yet, in a post-truth world, demonetisation also left public opinion in India deeply polarised. The language of the state had a deceptive appeal. In a society marked by abject poverty and inequality, and where everyday lives of citizens are marred by myriad forms of corruption, it came as no surprise that Modi’s misadventure was received as a decisive measure.

Economists like me knew of the earlier demonetisation of 1978. But we also knew that it had failed to unearth any significant amount of black money. We were also aware of quack ideologues of the right-wing who demanded measures like demonetisation and the substitution of income tax with a blanket transactions tax. But we had also dismissed them as obscurantist drivel.

Never did one imagine that one among these irrational ideas would actually find a place in economic policy. Of course, many aspects of neoliberal economics are intrinsically inverted on logic. But the demonetisation of 2016 beat them all.

***
In his address to the nation, Modi made two major claims in defence of demonetisation: on the one hand, it would stamp out counterfeit currency that was aiding terrorism; on the other, it would help the government unearth ‘black money’. Soon after the address, one also heard television commentators waxing eloquent on India’s imminent embrace of a cashless economy.

***
First, the claim that demonetisation would hit terror financing was overstretched because the total circulation of counterfeit currency did not exceed 0.002 per cent of the total notes in circulation. Second, no significant mobilisation of black money may be expected, as about 94 per cent of the unaccounted wealth was stored in the form of non-cash assets. Third, a cashless economy can never be created over diktats, as the persistence of cash was a structural feature of the economy.

What India needed was a structural transformation of its informal economy into a modern and productive sphere, which would systemically reduce the dependence on cash. A ‘war on cash’ would thus be ineffective and premature. Sycophants apart, these views were also shared by economists across the Left-Right spectrum.

***
First, according to the Reserve Bank of India’s (RBI) Annual Report for 2016-17, the total value of counterfeit notes of denomination Rs 500 and Rs 1,000 detected by banks rose from Rs 27.4 crore in 2015-16 to Rs 40.8 crore in 2016-17: an increase by just about Rs 14 crore. As a share of the value of Rs 500 and Rs 1,000 notes in circulation in November 2016, the value of counterfeit notes detected in 2016-17 amounted to just 0.0027 per cent. The critics were right; the extent of circulation of counterfeit notes did not, in any way, justify a drastic action like demonetisation.

Second, the RBI also released estimates of the value of old notes returned to the banks between 10 November 2016 and 30 June 2017. Out of the Rs 15.44 lakh crore worth notes of Rs 500 and Rs 1,000 in circulation as on 8 November 2016, about Rs 15.28 lakh crore had returned to the banks. In other words, 98.96 per cent of the demonetised notes were back in the banks and only 1.04 per cent remained outside. The return of about 99 per cent of the demonetised notes is the most important indicator of the failure of demonetisation.

In December 2016, the Attorney-General of India, Mukul Rohatgi, had informed the Supreme Court that the government did not expect more than Rs 12 lakh crore to be back in the banks. The remaining Rs 3 lakh crore was black money, which would not return to the banks and could be ‘extinguished’ and passed on by the RBI to the government as dividend.

Red-faced, the government tried to contain the damage by claiming that demonetisation was intended to bring back all cash into the formal banking system. But in the public eye, the jury was no more out. There was no black money left to be ‘extinguished’.

Third, the Central Statistics Office (CSO) releases quarterly estimates of gross value added (GVA). As chapters in this volume would argue, these estimates typically underestimate changes in the informal sector. Yet, despite methodological infirmities, on a year-to-year basis, the growth rate of GVA showed a decline from 7.6 per cent in the first quarter (Q1) of 2016-17 to 5.6 per cent in the Q1 of 2017-18. This decline was in continuation of a similar decline reported for the fourth quarter (Q4) of 2016-17. The CSO estimates have officially signalled that demonetisation was instrumental in intensifying recessionary tendencies in the Indian economy.

* * *
Stung by the estimates released by the RBI and the CSO, the Modi government tried to initiate a campaign to celebrate the ‘success’ of demonetisation in August-September 2017. This campaign made three major claims. First, demonetisation resulted in the ‘highest ever black money detection’. Black money worth Rs 16,000 crore (i.e., the remaining 1.04 per cent of Rs 15.44 lakh crore) did not return to the banking system.

Second, there was an ‘unprecedented increase in tax compliance’ after demonetisation. About 56 lakh taxpayers were newly added and the number of tax returns filed rose by 24.7 per cent in 2017-18 over 2016-17. Third, digital banking grew rapidly after November 2016. The number of digital transactions rose by 56 per cent between October 2016 and May 2017.

All the three claims were false. Papers in this volume provide a comprehensive coverage in this regard.

First, the claim of detection of Rs 16,000 crore was actually an admission of failure, because the very premise of demonetisation was the existence of at least Rs 3 lakh crore as black money. In fact, the costs of demonetisation hugely outrun its benefits.

One, even if we assume, conservatively, that India’s GVA shrank by 1 per cent after November 2016, the resulting economic loss would be about Rs 1.5 lakh crore.

Two, due to demonetisation, banks were inundated with new deposits worth lakhs of crores while credit outflows largely stagnated. As a result, the RBI had to mop up excess liquidity worth Rs 10.1 lakh crore from banks under the Market Stabilisation Scheme (MSS). The total interest outgo of the RBI on this count alone was Rs 5,700 crore.

Three, the RBI’s costs incurred for printing new notes rose from Rs 3,420 crore in 2015-16 to Rs 7,965 crore in 2016-17: a rise by Rs 4,545 crore. These costs did not include intangibles, such as the time spent by bank staff on consumer interface and paperwork over many months.

Four, due to the higher costs incurred by the RBI under different heads, the total surplus transferred by the RBI to the government fell from Rs 65,876 crore in 2015-16 to Rs 30,659 crore in 2016-17: i.e., a decline of Rs 35,217 crore.

In sum, demonetisation was an extraordinarily loss-making proposition for the exchequer.

Second, the claim of rise in tax compliance after demonetisation is simply unimpressive.

One, there is nothing remarkable about the rise in the number of tax returns filed in 2017-18 compared to earlier years. Compared to the corresponding previous year, the rise in the number of tax returns filed was 51 per cent in 2013-14; 12.2 per cent in 2014-15; 29.9 per cent in 2015-16; and 24.3 per cent in 2016-17.3

Two, even among the 56 lakh assessees newly added, about 38.8 lakh assessees (or about 69.4 per cent) reported an annual income of less than Rs 5 lakh. The average annual income of these new taxpayers was only Rs 2.7 lakh. In sum, the increase in tax revenue from the new assessees would be insignificant.

Three, the claims of the government on the extent of spread of digital banking defy basic statistical logic. Analysis shows that, one, the percentage rise in the number of digital transactions were primarily owing to low base effects. Two, the total value of non-cash transactions rose by only 18.8 per cent between November 2016 and August 2017. Despite efforts to popularise mobile banking, the value and volume of mobile-based transactions recorded negative growth rates between November 2016 and August 2017.

All available evidence till August 2017 points to the return of cash in everyday transactions. The government’s aim of forcing citizens to shun cash had failed.

By : R. Ramakumar

DISCLAIMER : Views expressed above are the author’s own.

(R. Ramakumar is Dean, Centre for Study of Developing Economies, School of Development Studies, Tata Institute of Social Sciences, Mumbai. He can be reached at [email protected])

Analysis

Ministry says yoga is not sport, but DU colleges still reserve seats

Colleges have autonomy to choose the sports under which they wish to give admissions. University cannot tell a college to pick a specific sport. It is their discretion. These sports do not come under Sports Ministry, nor are they regulated by it.

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Delhi University

New Delhi, June 12 (IANS) Is yoga a sport? The Ministry of Youth Affairs and Sports (MYAS) says it is not. Yet, 11 Delhi University (DU) colleges have this year reserved seats for the discipline under their sports quota.

The university and the colleges, meanwhile, have been shifting responsibility back and forth.

After recognising it as a sport in 2015, the MYAS reversed its decision the next year. “After elaborate discussion, it was concluded that yoga has various dimensions/arms in which competitions are not possible. Hence, it was agreed that Yoga cannot be termed a sport. Consequently, it may not be appropriate to recognise any organisation as NSF (national sports federation) for yoga,” the Sports Ministry had said in a letter dated December 21, 2016, to all national sports federations and the Indian Olympic Assocation.

“It was also agreed that the entire matter relating to yoga will continue to be handled by the Ministry of AYUSH,” the letter said.

When IANS contacted the DU Sports Council for a clarification, it said that the colleges had requested the university to conduct yoga trials.

“Yes, Yoga has been under sports quota and it has been there in previous years also. Last year, 19 colleges had applied for trial for Yoga under sports quota. The decision, in which sports admissions are to be made, are taken by the colleges,” Anil Kalkal, Director of the varsity sports council which conducts the centralised trials for sports quota on behalf of colleges, told IANS.

“Colleges have autonomy to choose the sports under which they wish to give admissions. University cannot tell a college to pick a specific sport. It is their discretion. These sports do not come under Sports Ministry, nor are they regulated by it,” he said.

Although colleges are entitled to choose a sport for trials and reserve seats under it, the list of sports from which they are to choose is compiled by the varsity.

Kalkal cited another factor in the form of inter-university competition, held by the Association of Indian Universities (AIU) — a non-governmental body listed under the Societies Act — as one of the reasons for considering Yoga as sport.

“If such was the thing (de-recognition) why would AIU conduct the yoga competition? The day AIU will tell us that Yoga is not a sport and stop conducting the competition, we will stop taking admission under it,” he said.

“If colleges are requesting to admit students under yoga, what can the university do? We have to conduct the trials. You should ask the colleges why they requested us to conduct yoga trials,” he said.

An official from one of the colleges which has reserved seats for Yoga this year, when contacted, passed the buck to the university.

“We consider Delhi University and AIU the governing bodies. If an activity is listed as sport by the university, we follow that. If DU tells us that it will not conduct trials in yoga then we will also give it up. Government doesn’t have a role in it,” M.P. Sharma, sports Convener at Hansraj College, told IANS.

Ambiguity on the legal sanction of quota for yoga got further worsened when an AIU official conceded that the association itself didn’t consider yoga as a sport.

“The competition is there because it helps in maintaining your body, mind and spirit. We do not consider it sport. This is not a sport. But we conduct the competition to improve the standard of performance,” said AIU Joint Secretary (Sports) Gurdeep Singh.

Singh also conceded that association’s decisions are not binding on the university.

“We have nothing to do with the DU sports quota. DU follows its own constitution. You talk to DU for this. A collective decision is made by our sports board. Whatever is in the larger interest of students, we do that. It’s not a sport but an activity, which helps strike a balance. The entire world has recognised the value of yoga, I don’t know why only here people have an issue with it,” he said.

However, in spite of what Singh said, the AIU website lists yoga as a sport in its “Calendar of Events” for 2017.

Although it is a thing which has been going on for years, some DU teachers, when apprised of the matter, called the decision (listing of yoga as sport by the university) as “arbitrary”, stating that it was never presented before the Academic or the Executive Council of the university.

“As far as reservation of seats under sports quota is concerned, we have an understanding of reserving them for only those sports which are recognised in Olympics. On what basis can they include yoga in it? asks Rajesh Jha, a DU professor and Executive Council member.

“This will end up undermining the chances of admission of those who are trained in genuine sports. This seems like a completely arbitrary decision,” he added.

Trials for yoga are scheduled to be conducted later this month.

Apart from Hansraj, Gargi College, Deshbandhu College, College of Vocational studies, and Kalindi College are few of those which have given their names for yoga trials and have reserved seats under the activity.

(Vishal Narayan can be contacted at [email protected])

— IANS

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Analysis

Global cues, inflation to dictate equity indices trend

The Central Statistics Office (CSO) is slated to release the macro-economic data points of IIP and CPI (Consumer Price Index) on June 12.

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Sensex Nifty Equity

Mumbai, June 10 : Monetary policy announcements by global central banks coupled with the upcoming release of major macro-economic data points on industrial production and inflation are expected to set the trend for the domestic equity indices.

According to market observers, other key factors such as rupee’s movements against the US dollar and fluctuations in crude oil prices as well as developments on monsoon’s progress will impact investors’ risk-taking appetite.

“Next week will have a flurry of economic data for India,” Devendra Nevgi, Founder and Principal Partner, Delta Global Partners, told IANS.

“A negative surprise in inflation data would reinforce the hawkish stance of RBI. A weaker external sector data would have an impact on INR, especially during a negative EM (emerging markets) sentiment. IIP (Index of Industrial Production) would be watched closely for an ongoing economic expansion.”

The Central Statistics Office (CSO) is slated to release the macro-economic data points of IIP and CPI (Consumer Price Index) on June 12.

Subsequently, other major macro-economic data points such as WPI (Wholesale Price Index), Current Account Deficit and Balance of Trade figures will be released.

On the global front, monetary policy announcements by the US Federal Reserve, ECB (European Central Bank) and the Bank of Japan (BoJ) will form major themes for the upcoming week.

“The US Fed rate move and language will set the tone for sentiment in EM as well Indian markets. The key is whether the US Fed pays attention to the vulnerable EM situation,” Nevgi said.

Besides, the movement of Indian rupee against the US dollar and fluctuations in global crude oil prices will also set the course for the key indices.

On a weekly basis, the Indian rupee weakened by 45 paise to close at 67.51 against the US dollar from its previous close of 67.06 per greenback.

In terms of investments, provisional figures from the stock exchanges showed that foreign institutional investors bought scrips worth Rs 1,367.22 crore during the week ended June 8, 2018.

Figures from the National Securities Depository Ltd (NSDL) revealed that foreign portfolio investors (FPIs) invested equities worth Rs 3,757.94 crore, or $560.40 million, in the last week.

Additionally, technical charts show that the National Stock Exchange (NSE)’s Nifty50 remains in an intermediate uptrend.

“Technically, with Nifty recovering from the lows of 10,552 points, the intermediate trend remains up,” said Deepak Jasani, Head of Retail Research, HDFC Securities.

“Further upsides are likely in the coming week once the immediate resistances of 10,814 points are taken out. Crucial supports to watch for any weakness are at 10,618 points.”

Last week, the key Indian equity indices — the S&P BSE Sensex and the NSE Nifty50 — rose on the back of Reserve Bank of India’s “neutral” stance on a future rate hike trajectory, along with its reform measures for the realty, bond and banking sectors and value buying.

Consequently, the barometer 30-scrip Sensitive Index (Sensex) of the BSE rose by 216.41 points or 0.61 per cent to 35,443.67 points on a weekly basis.

Similarly, the wider Nifty50 of the NSE closed last week’s trade at 10,767.65 points — up 71.45 points or 0.67 per cent — from its previous close.

(Rohit Vaid can be contacted at [email protected])

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Analysis

CBDT says RTI replies on ‘write-off’ of IT arrears were ‘erroneously sent’

According to the RTI replies, the Pr-CCIT, Hyderabad had stated that it had written off a total of Rs 3002.20 crores in two financial years, 2016-2017 and 2017-2018.

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RTI ACT

Mumbai, June 1 (IANS) In an apparent volte-face, the Central Board of Direct Taxes has said that figures of ‘write-offs’ of Income Tax arrears furnished under right to information action were sent out in error.

Responding to an IANS report “Income Tax Department writes off huge arrears, show RTI replies” on May 28, 2018, the CBDT’s official spokesperson said that the the Principal Chief Commissioner of Income Tax (Pr-CCIT) Hyderabad had provided erroneous figures of ‘write-offs’ under an RTI application filed by Chandra Shekhar Gaur, a Neemuch (Madhya Pradesh) activist.

According to the RTI replies, the Pr-CCIT, Hyderabad had stated that it had written off a total of Rs 3002.20 crores in two financial years, 2016-2017 and 2017-2018.

The CBDT spokesperson, Surabhi Ahluwalia, Commissioner of Income Tax (Media & Technical Policy) now says that the information provided was “due to an inadvertent error made by the CPIO who reported the figures of ‘Cash Collection’ or recoveries made from arrears in these years as the figures of arrears written off.”

The correct amount of arrears written off in those two years for the Andhra Pradesh & Telangana by the Pr-CCIT Hyderabad, was actually zero (Nil), as no write-off orders were passed in these (two) years, he said, adding that the RTI applicant Gaur has been informed of the mistake.

Interestingly, the IANS had sent an email to the CBDT on May 16, with specific queries on the figures and the authorisation levels for the ‘write-offs’, which was ignored for nearly 13 days.

After the IANS story was published on May 28, the CBDT swung into action with a reply.

On the figures of tax arrears, totaling to over Rs 50,000 crore, including over Rs 33,157.97 crore from Pune alone, provided under RTI by various IT offices across India, the CBDT spokesperson said it had already collected Rs 44,633 crore during 2017-2018, which was 14.6 percent higher than Rs 38,944 crore collected in the previous fiscal.

Besides, the CBDT said of the current demands, Rs 52,537 crores was recovered by the ITD in 2017-2018.

The CBDT reiterated that ‘write-off’ of arrears was a detailed and long-drawn process and only initiated for arrears which become irrecoverable “after all avenues for recovery are exhausted.”

Besides, all proposals of ‘write-off’ of arrears above Rs 5,000 are examined by a committee at Zonal, Regional and Local levels, while any proposals for ‘write-off’ above Rs 25 lakh must “be approved by CBDT” and any such amount above Rs 50 lakh need approval “by the Finance Minister.”

For small value arrears upto Rs 10,000, there are relaxations in guidelines under a fast-track process, but the rigorous process remains in place and during 2017-2018 (upto December 31, 2017), a meager amount “of Rs 5.6 crore was written off in the entire country, the spokesperson said.

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