Demonetisation, digital divide increases inequality

Demonetisation, digital divide increases inequality

Some people have more unaccounted money than the rest. This seemed to be the primary presumption behind the demonetisation, which apparently is the object of great debate raging the nation.

According to the Global Wealth Report 2016 compiled by Credit Suisse Research Institute (CSRI), India is the second most unequal country in the world with the top 1% of the population owning nearly 60% of the total wealth. In light of this revelation, it is yet to be clear how much of the wealth of the top 1% comes under government scanner. The report further said that personal wealth in India is dominated by property and other real assets, which make up 86% of estimated household assets.

According to the government figures, 6% of black money is in cash, 94% of it in real estate, big buildings and in foreign bank accounts. It is inconceivable how the government chose to invest so much energy at the cost of so much hardship and ill-will to recover relatively inconsiderable money not reported in the national income accounts.

The CSRI report said that while wealth has been rising in India, not everyone has share in this growth. "There is still considerable wealth poverty, reflected in the fact that 96% of the adult population has wealth below $10,000, whereas this percentage is only 68% in China," it said.

According to the 2015 World Wealth Report, India had 1,98,000 high net worth individuals (annual income over $1 million) with a combined wealth of $785 billion. A number of studies have suggested that high inequality subverts governance, in turn harming the long-term prospects of economic development.

That a larger number of people have come to support Prime Minister Narendra Modi, at least initially, despite the hardship they came to endure post demonetisation, is proof that a large number of them consider that the fat cats laundering public money and hoarding black wealth constitute the ‘other’. The so-called rich-poor divide had never been so stark, which is yet again evidence why no government can hope to survive without seeming to look as pro-poor.

While Modi has capitalised on the general disdain for the rich, feeding fat on the assumption that most of them had thrived on their ill-gotten wealth, he had played a subtle game. But going by many projections, it is all set to prove as a damp squib.

As of December 3, about 82% of the demonetised bills, amounting to about $185 billion, had been deposited in bank accounts and validated to be legitimately earned money which happens to be a small portion of the $2 trillion black money estimated to be stashed overseas has been captured.

The Board of Internal Revenue (UK) defines black money “as economic activity generating income which are concealed from the revenue collecting authorities with the intention of evading tax”. Such activities that go unreported/under-reported or are unmeasured by the society’s current techniques for monitoring economic activity must come under scrutiny. As per the 2014-15 figure, barely 4.87 crore people filed tax returns, comprising less than 4% of the population (pegged at 125 crore).

In 2012-13, the figure was close to only about 1% of the population. It must be borne in mind that those who file returns may not be actual taxpayers on the ground of being below threshold. One reason for the demonetisation drive might be to handle the issue of domestic tax evasion which is of no less importance than the need to chase the black money stashed abroad.

But how about recovering the bulk of which is spirited away in tax-free havens such as Switzerland and Panama, from where it is invested through mailbox corporations in equity, real estate and bullion all over the world?

Another form of inequality is the digital divide. On the one hand Modi is asking the young people to resort more to cashless transactions and on the other he is silent about the vast underclass who are clueless and ignorant, without access to or absence of a proper digital infrastructure. In the absence of a systematic and concerted investment in digital infrastructure and Internet access, digital transactions will not replace cash very easily.

ATM access

Compared to some lesser-developed countries such as Kenya, Nigeria or Egypt, India fares poorly in terms of ATM access. The World Bank estimates that just about 35% of the population above the age of 15 has had used a bank account while less than 10% of the population older than 15 years had a debit card and less than 3% had a credit card in the year ending March 2014.

The amount of top 20 non-performing assets (NPA) accounts of public sector banks stands at Rs 1.54 lakh crore. The perception that Modi is trying to shield the rich and corporate giants – who commit huge tax frauds in sanitised, cashless financial environment – has a familiar parallel.

After the 2008 election, politicians doubled down on advancing policies that transparently favoured the top 1% of earners  while obstructing measures such as the extension of unemployment insurance.

News of a driver claiming in suicide note that he had helped former BJP minister in Karnataka G Janardhan Reddy launder untaxed money - who was in the news in November for spending crores of rupees on his daughter’s wedding, and reportedly inviting 50,000 guests, at a time when banks have been ordered to limit withdrawals due to demonetisation of Rs 500 and Rs 1000 notes - firms up the perception.

Modi must not want to comfort the comfortable and afflict the afflicted by any stretch of rightist solidarity.