21.12        ndian     onom
         (a) Impact on Gross Domestic Product (GDP):             and costs of both forms of payments will
               Economic activities have been affected            be sensible. The transition to digitalisation
               adversely. Thus, national income will get         must be gradual and inclusive, too.
               hit also, but it will be only temporary.          Digitalisation must be incentivised and
               The GDP might be lower by 0.25 to 0.5             the incentives favouring cash neutralised.
               per cent (coming to around 7 per cent).           The cost of incentivisation must be
               The implementation of GST, follow-up              borne by the public sector (Government/
               to demonetisation and other structural            RBI) and not the consumer or financial
               reforms should put the growth to the              intermediaries.
               8–10 per cent range that India needs.        (iv) Efforts to collect taxes on newly disclosed
         (b) Redistribution of income: It will redistribute      (and undisclosed) wealth should not
               resources also having following effects on        lead to tax harassment by officials at all
               the fiscal accounts of the Government:            rungs of the hierarchy. A shift is needed
                   RBI/Government may receive some               to greater use of data, smarter evidence-
                    gains from the unreturned cash—              based scrutiny, more reliance on online
                    wealth gains.                                assessments with less interactions between
                                                                 tax payers and tax officials. Non-punitive
                   Income taxes could go up as black             means should be evolved to enhance tax
                    money was deposited in bank                  compliance.
                                                             (v) So that demonetisation indeed proves
          Against this there are three negative effects.         a catalyst for long-run changes in
     First, costs of printing new notes; secondly, costs of      behaviour, it will be required to
     sterilising the surge in liquidity into the banking         complement demonetisation with other
     system (via issuance of Market Stabilisation                non-punitive,          incentive-compatible
     Scheme bonds); and thirdly, if nominal GDP                  measures that reduce the incentives
     growth declines, corporate and indirect tax                 for tax evasion. Demonetisation was a
     revenues of the centre could decline but so far             potentially powerful stick that now needs
     there is no clear evidence.                                 carrots as complements. A five-pronged
                                                                 strategy could be adopted:
     tAPPing the ProsPects                                       (a) GST should include activities that are
     The Government needs to maximise the long-                       sources of black money creation—
     term benefits and minimise short-term costs of                   land and other immovable property;
     demonetisation. For this purpose, the following             (b) Individual income tax rates and real
     measures look beneficial:                                        estate stamp duties could be reduced;
          (i) Remonetisation process should be faster.            (c) Income tax net could be widened gradually
         (ii) Any windfall revenue arising from                       and, consistent with constitutional
               ‘unreturned notes’ should be used for                  arrangements progressively encompass all
               capital-type expenditures and not revenue              high incomes;
               ones. As this income will be one-off, its         (d) The timetable for reducing the corporate
               use should be one-off.                                 tax rate could be accelerated; and
        (iii) Digitalisation must continue in medium             (v) To reduce discretion and improve
               term, though neither it is a panacea nor               accountability, tax administration
               cash economy is bad. Balancing benefits                needs improvement.