Of all the governance breakthroughs achieved by the Narendra Modi government, its record in improving welfare delivery has been discussed widely. Under the NDA government’s direct benefit transfer (DBT) initiative, enabled by the Pradhan Mantri Jan Dhan Yojana, which was launched immediately after Narendra Modi entered office, Rs 3 trillion in welfare, both in cash and kind, has been disbursed to over 50 crore identified beneficiaries in the 2018-2019 financial year, according to government data. Since the programme’s inception on January 1, 2013, Rs 6.77 trillion has been released directly to beneficiaries.
In addition to the measurable outcomes, DBT has eliminated pilferage. Over four crore fake or duplicate welfare beneficiaries (liquefied petroleum gas accounts) and 2.82 crore (food and public distribution accounts) have been weeded out. This rationalisation and clean up across the welfare categories has cumulatively delivered savings of Rs 1.2 trillion since 2013-2014. This systemic change is of enormous importance as the savings and efficiency gains compound over time. Plus, the way welfare is delivered makes life easier for the beneficiaries, and it also has a cascading fiscal benefit.The Modi government’s economic strategy has enabled formalisation and financialisation on a scale we have never seen before. The rocket fuel that is powering these two changes is digital technology. Most analysts have a narrow focus on one of these policies and are unable to see the results of the holistic strategy. But what’s happening is this: formalisation, financialisation and digitisation are reinforcing each other in a virtuous cycle to transform the economy.
The shift to the Goods and Services Tax (GST) and concomitant simplification of the patchwork of taxes, replaced along with the incentive to claim input tax credit, has driven smaller firms to get registered. The government informed Parliament in March that over 10.3 million businesses were registered under GST.
Of these, 6.4 million migrated from the old tax regime and 3.9 million were new registrants. Instead of operating in cash, small businesses are now in the tax net. This is good for both government revenue and businesses because those businesses can now access low-cost formal credit by virtue of keeping records, tracking cash flows and being in the organised economy. Perhaps for the first time in history, it is now possible in India to move from collateral based lending to cash flow based lending for small businesses.
Demonetisation ranks among the most polarising policy decisions made by any government anywhere in the world. The bold and unprecedented act of withdrawing nearly 90% of currency by value is a policy that straitjacketed members of the academia and think tanks would never even contemplate, let alone recommend.
These self-appointed authorities on what is “credible” may say that the policy was not “credible” and they would thus not recommend it, but the fact is demonetisation has brought a behavioural change in India.
A report by investment firm, Omidyar Network, and the Boston Consulting Group, published in November 2018 said that “India has leapfrogged 2.5 years ahead on the digital payment curve post-demonetisation in 2016”. In October 2016, Rs 0.49 billion was transferred in 0.10 million transactions through the Unified Payment Interface (UPI) standard built by the National Payments Corporation of India. For March 2019, the value transferred through UPI had increased over 2,700 times to Rs 1.33 trillion with about 800 million transactions completed, and there is ample room for more growth. There is a reason entrepreneurs and venture investors — those who are building products and betting their capital on these structural policy changes (unlike the armchair critics, who’ve likely never engaged with people outside their academic departments) see India as the most promising financial technology market in the world.
It is a mistake to see demonetisation in isolation. It has been the most visible in a series of steps taken to reduce cash use and prevent the accumulation of black money. Other steps include specialised, stronger laws for preventing benami transactions and money laundering, limits on the amount that can be paid entirely in cash and tighter know-your-customer rules in financial services.
As it becomes harder to generate and deploy cash, and as more businesses and individuals become tax compliant, India’s aggregate savings is moving to financial assets from physical assets such as real estate and gold. Digitisation has slashed identification and execution costs, and a record number of retail investors are becoming investors in the stock market. This has the benefit of making ordinary Indians stakeholders in the wealth creation that is to come, as well as reducing India’s dependence on foreign institutional investment.
These policy changes will bring a higher sustainable growth rate and a fiscal boom like India has never seen before. The next government will have the opportunity to shape the priorities and define the areas that receive capital from the public exchequer. In 2004, the Atal Bihari Vajpayee government had left a similarly robust economy, but the boom in tax revenues and the fruits of the intense reform efforts were frittered away by the Sonia Gandhi-Manmohan Singh government. As India chooses its capital allocator for the next five years, voters should choose wisely: Narendra Modi has demonstrated the ability to take risks and drive policy changes, and deserves a second term as PM.