Sunday, November 20, 2016

Psychological warfare in Demonitisation

Psychological warfare in Demonitisation

The Government of India on 8th November night declared that the 500 and 1000 rupee notes are not legal tender from midnight that is effectively from 9th November. This 9/11 moment is as momentous in its impact on India as was the 9/11 attack on the twin towers of America.

If one looks at the messages emanating from the Government, much of it is warning to the public about the consequence of certain actions. It is a strange situation where the Government is consistently telling people to not to do certain things and if they don't listen then they will be prosecuted. If people are doing something wrong then they should be prosecuted. Lets analyse some of the warnings of the Government.

Since the Government announced that the Rs. 500 and Rs. 1000 notes are no longer legal tender and needs to be exchanged in the bank or deposited in the bank accounts, people have been depositing the money in the bank accounts. The Government then announced that any deposits in the bank accounts above Rs. 2.5 lakhs will be investigated. So some people started depositing only Rs. 2.5 lakhs in each account.

Then the Government warned that deposits in the name of housewives will be questioned ie the Government can question the source of funds.

It was reported that the Jan Dhan Yojana accounts that were opened and were lying dormant were being used to deposit upto the allowed Rs. 50,000. The Government warned that such deposits will be investigate.

Now the Income Tax department of Government of India has announced that if anyone is depositing cash in someone else's account, then these cases will be investigated under the Benami Transactions Act. The person whose account the money will be deposited will be treated as "benamidar" and the person who is the original owner of the money will be the termed as the "beneficial owner". Under the Benami Transactions Act all the persons involved are liable to be punished from anywhere between 1 to 7 years of rigorous imprisonment (R.I).

Why Govt. Creating Fear Psychosis:

The question that can come to mind is why the Government is trying to induce fear in people? Why this effort to create fear psychosis? The answer is two fold.

It Helps Political Narrative:

The first is the political narrative. The Modi Government hopes to utilise this as their big bang war on corruption and black money and use it to fight the UP and Punjab elections in early 2017. They believe, that the poor people will buy the argument that though they faced some inconvenience, they helped down in hunting the rich and the blackmoney holders. If a soldier can fight for the country, why can you not suffer this huge inconvenience for the betterment of the country, runs the argument. Since it gives the poor the vicarious pleasure of hunting the rich, it is a kind of a de-facto class warfare. Instead of directly proclaiming themselves as communists, Mr. Modi believes they can usurp the class struggle theme of the communists and get an entirely different class of voters cutting across caste and religious boundaries.

It is ofcourse a different matter that this chaos is resulting in a severe disruption of India's predominantly Cash only economy and the GDP is likely to contract. According to initial estimates the economy will take a year to come back to the days before demonitisation.

Income Tax Department will drown with work:

The Second reason for creating this fear psychosis is that the Income Tax department is not geared to handle this massive amount of work.

Only 2.87 crore Indians had filed personal income tax in the assessment year 2012-2013. Out of this 2.87 crores 1.62 crores didn't pay any income tax. So one can realise that the work of the Income Tax department is to analyse the data and work on this number.

Till last year there were some 31 crore bank accounts and then the Government is supposed to have added some 20 crore bank accounts under Jan Dhan Yojana. So roughly 50 crore savings bank accounts may be in India. Since the Government is forcing people to deposit the Rs. 500 and Rs. 1000 notes in the bank accounts, it is expected that the money will be deposited in many of these accounts. Due to computerisation it is easy to get data of high amounts of money deposited in the banks.

However, now the Income Tax department has to scan through data of deposits in atleast 50% of the bank accounts. I am assuming 50% because many of the Jan Dhan Yojana accounts are supposed to have been used by people to deposit money. So the workload of the Income Tax department is going to increase by atleast a massive 10-12 times. From roughly 2 crore plus accounts to some 25 or 30 crore accounts, the workload increase is going to be humongous. So it would be in their interest to discourage people to not deposit blackmoney in different accounts.

India with a population of 1.3 billion is much more than any other country except China. The sheer scale of work here is a challenge. To add to that challenge is this unprecedented action of the Government forcing people to deposit their cash in the bank accounts. One thing is for sure, neither the blackmoney holders can sleep in peace, nor the income tax guys will have any respite from work, work and more work.

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