August 11, 2017 / 5:00 AM / a month ago

India's war on cash had valuable benefits

A customer waits to deposit 1000 Indian rupee banknotes in a cash deposit machine at bank in Mumbai, India, November 8, 2016. REUTERS/Danish Siddiqui

MUMBAI (Reuters Breakingviews) - Counting anything in a country of India’s size is a mammoth exercise. Nine months after Prime Minister Narendra Modi scrapped high-value banknotes in a clampdown on the “black economy”, there is no clarity on how much of the banned $240 billion individuals returned. Still, this has given real momentum to India’s anti-corruption campaign.

India is still wondering whether the radical move was worthwhile. It was designed to force people to give up illicit wealth rather than deposit it in the bank and risk attracting the scrutiny of the taxman. So if a high proportion of notes were returned, that would suggest Indians found it easy to wash funds before recouping their full value - or that there was an embarrassing amount of fake currency circulating.

At one stage, economists hoped that would yield a bumper payout from the RBI. Now the Reserve Bank of India is paying to New Delhi less than half the annual $11.7 billion dividend it expected, probably because of costs related to the experiment.

“Demonetisation”, as the move is known, has also clearly taken its toll on consumption. Annual economic growth slipped to 6.1 percent in January to March. It has also added to stress on the rural population. The pressure mean India will now have to stretch to meet its 3.2 percent fiscal deficit target.

Yet one effect deserves more attention. Modi has changed the way rich people think and talk about compliance. This is a result of the note ban and other moves that will create a paper trail. These include forcing individuals to link their biometric identity to everything from tax returns and mobile phone numbers, to the implementation of India’s new goods and services tax.  

In sum, it looks like the net is closing. This week India reported a 25 percent increase in filings of income tax returns, more than twice the growth of the previous year. That is progress in a nation where less than 2 percent of people pay income tax. Corruption is the single biggest problem facing emerging economies. Modi’s fix is not perfect and may prove expensive in the short-term. But unorthodox policymaking, like demonetisation, and big data might together clean things up.

Breakingviews

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