DeMo Dividends for NaMo

Demonetization Dividends for NaMo

Through demonetization, Modi has fish out BJP from clutches of corporate funding, stitched off ‘forward-trader’ party tag by creating his acceptability among all sections

By Asit Manohar

It is almost ten months since Demonetization was imposed banning `500 and `1000 notes in India. However, neither government nor any institution is able to give proper information about its benefits being accrued on the government exchequers. Very recently, the finance minister of India Arun Jaitley announced in a press briefing that post demonetization, number of heads filing Income Tax Return (ITR) in last fiscal has shot up by near 25 percent. He also divulged that the government added 9.1 million new taxpayers in 2016-17, an 80 percent increase over the typical yearly rise, highlighting the impact of India’s November demonetization of high-value currencies. Though, the finance minister stopped at economic gains of demonetization, there are some political gains as well which BJP got for being in the government. And majority of the opposition parties, including Congress, are convinced about this and they tried their level best to expose BJP’s gains during demonetization. But, neither Congress nor any other leader of the opposition could succeed in bringing people on their page. As a result, BJP stormed into the power corridors of Lucknow with historical mandate. They even went on to win most of the civic body polls and state assembly polls in most of the state polls where it had organizational structure. It even registered its presence in the state where it was an unknown political force. Hence, demonetization has paid both political and economic dividends for the ‘party with difference.’


Since, the information has come from the union finance minister, this is expected to significantly boost the government’s tax revenue. India had only 55.9 million individual taxpayers at the end of 2015-16. The Economic Times, citing two top government officials, reported on 3 May that the number of people who filed tax returns surged by 9.5 million.

Not everyone who pays tax files returns. Many are salaried employees whose tax is deducted and paid by the employers. In 2015-16, only 37 million individuals filed tax returns.

The increase in taxpayers may be used by the government to justify demonetisation, which critics have claimed did not help in its original objective of curbing black money, terror financing or counterfeit notes.

“About 9.1 million new taxpayers have been found, significantly expanding the taxpayer base,” a senior government functionary said on condition of anonymity.

The person, who is in a position to be aware of data and thinking at the highest levels of the government, added that this was partly on account of demonetisation.

It is estimated that a substantial part of the invalidated currency has returned to the banking system—official data on this is yet to be released—but the government has insisted, and rightly so, that the mere act of depositing money in a bank account doesn’t convert black money into white money.

A second person, a government official familiar with the matter who asked not to be identified, confirmed this number. He said that every year, typically, India adds around 6 million taxpayers, and around 1 million stop paying taxes (on account of death, retirement, etc). That would mean India added around 4.1 million more taxpayers in 2016-17 than it otherwise would have.

The second person said India ended the year with 65 million taxpayers. In June 2016, Prime Minister Narendra Modi asked the income-tax department to work towards increasing India’s tax base to 100 million individuals.

A low taxpayer base has for long been a key drag on the government’s finances. India’s tax revenue, including indirect taxes, as a percentage of its gross domestic product (GDP) was 16.7 percent in 2016, compared with 25.4 percent in the US and 30.3 percent in Japan.

Among the 37 million individuals who filed tax returns in 2015-16, 9.9 million showed income below the exemption limit of `2.5 lakh; 19.5 million, income between `2.5 lakh and `5 lakh; 5.2 million, between `5 lakh and `10 lakh; and only 2.4 million people showed income over `10 lakh. Of the 7.6 million individual assesses who declared income above `5 lakh, 5.6 million were in the salaried class. Only 172,000 people declared income exceeding `50 lakh in the entire country.

In comparison, in the last five years, more than 12.5 million cars have been sold and, in 2015, 20 million Indians travelled overseas, either for business or pleasure.

In his budget speech on 1 February, finance minister Arun Jaitley quoted these figures and said India is largely a tax non-compliant society. “The predominance of cash in the economy makes it possible for the people to evade their taxes,” he said.

Jaitley added in his speech that after demonetization, the preliminary analysis of data received in respect of deposits made by people in old currency presented a revealing picture. “During the period 8 November to 30 December 2016, deposits between `2 lakh and `80 lakh were made in about 10.9 million accounts with an average deposit size of `5.03 lakh. Deposits of more than `80 lakh were made in 1.48 lakh accounts with average deposit size of `3.31 crore. This data mining will help us immensely in expanding the tax net as well as increasing the revenues, which was one of the objectives of demonetization,” he said then.

This year’s Economic Survey said that perhaps the most important marker of the success of demonetization would be tax collections.

“The number of new income tax payers as well as the magnitude of reported and taxable income should go up over time. That will be the surest sign of success.”

The International Monetary Fund (IMF), in its latest Asia Pacific Economic Outlook, said that after demonetization, bank deposits of large amounts were expected to attract high scrutiny by tax authorities and the information obtained as a result of income verification could lead to a durable impact on the tax revenue base. “With only about 1percent of the Indian population paying personal income taxes, the scope for broadening the tax base is clearly large,” it said.


The number of I-T returns filed for 2016-17 year grew by 25 percent to 2.82 crore, as increased number of individuals filed their tax returns post demonetization, the tax department said on Monday.

The growth in ITRs filed by Individuals is 25.3 percent with over 2.79 crore returns having been received up to August 5 as against over 2.22 crore returns filed in the corresponding period last fiscal. “As a result of demonetization and Operation Clean Money, there is a substantial increase in the number of Income Tax Returns (ITRs) filed,” an official statement said. The total number of returns filed as on August 5 stands at over 2.82 crore as against over 2.26 crore filed during the corresponding period of 2016-17. This was an increase of 24.7 percent compared to growth rate of 9.9 percent in the previous year.

The last date for filing of income tax returns by individuals and HUFs, who need not get their accounts audited, was August 5. The finance ministry said that the number of ITRs filed showed that substantial number of new tax payers have been brought into the tax net subsequent to demonetization. The effect of demonetization is also clearly visible in the growth in direct tax collections, it said. Advance tax collections of personal income tax (other than Corporate Tax) as on August 5 showed a growth of about 41.79 percent over the corresponding period in 2016-17.

Personal Income Tax under Self Assessment Tax (SAT) grew at 34.25 percent over the corresponding period in 2016-17. “The above figures amply demonstrate the positive results of the government’s commitment to fight the menace of black money,” it added. The Central Board of Direct Taxes (CBDT), which is the apex policy making body of the I-T department, is committed in its resolve to eradicate tax evasion in a non-intrusive manner and widening of tax base.


John Maynard Keynes, British economist and champion of free markets, said, “The importance of money flows is a link between the present and the future.” Keynes believed that the unique function of money is to carry us from where we are currently to where we are destined to go. The increased participation from domestic investors in Indian equity markets submits that they are scripting a promising future for themselves.

A study reveals that between 2004 and April 2014 (pre-general elections), monthly equity flows and MSCI India Index performance had a strong correlation. MSCI India (US$ Index) performance declined 7 percent (median) over the same period in concurrence with foreign fund selling. However, the trend has altered since May 2014—MSCI India Index has declined less than 1 percent (median) during periods of foreign institutional investors (FII) selling, and this illustrates the increasing might of domestic flows.

Of these, Indian household savings have become a dominant driver of local institutional flows. Mutual funds had pumped in `48,005 crore, as against `18,783 crore by FIIs in 2016, shows investment data. This reflects the appetite of domestic investors for equity markets (Source: NSE, BSE, Sebi and Amfi).

Peter Lynch, legendary value investor, mutual fund manager, and philanthropist, said “There are substantial rewards for adopting a regular routine of investing, and following it no matter what, and additional rewards for buying more shares when most investors are scared into selling.” Hence, investors planning to participate for long term in Indian equity markets should follow Lynch’s counsel for rich dividends.

Mutual funds have unfailingly received significant inflows through systematic investment plans (SIPs), which were deployed in equity markets. Incidentally, demonetization has been a game changer for the mutual fund industry, as equity inflows have touched new highs after the November move. This was also at a time when large section of investors had turned cautious about investing in other asset classes like gold and real estate. This has been reflective in the subscriptions into SIPs, which has been rising consistently. Data from the Association of Mutual Funds in India (Amfi) shows monthly inflow of `4,269 crore through SIPs in April 2017, as compared to just `980 crore per month in 2012, aptly reflecting the increased interest in recurring savings allocations.

Thankfully, it is the balanced fund category that has witnessed strong momentum as Indian savers are gradually gravitating from physical to financial savings with first billion dollar-plus monthly inflows into balanced funds (aggregate net subscription for April 2017 stood at a historic high of $1.1 billion). Mutual funds’ equity and equity-linked savings schemes (ELSS) witnessed an aggregate net inflow of Rs 94 billion ($1.5 billion) in April 2017, which is more than twice the April 2016 inflows, and 61 percent higher than the past 12-month average.


In 2014, Modi stormed to power promising total crackdown on the black money that can help fetch `15 lakh in each citizen’s kitty. However, later BJP president Amit Shah turned down this promising citing it was a mere electoral ‘jibe’ which had nothing to do with normal life. But, it’s for sure that the demonetization help establish Modi as a leader who has the guts to take on black money horders. But, there are some more dividends that Modi fetched for his BJP for being in the government.

Since, demonetization was announced as a shocker; none of the political parties in the opposition had that much of time to adjust with new regime than BJP. Hence, BJP was better placed to adjust post demonetization. Opposition allegations of investing in land were doing the rounds during demonetization when both Congress and its UPA allies had alleged BJP of offsetting its cash into land investments which helped the ‘party with difference’ to ‘save’ its `500 and `1000 notes ahead of the demonetization announcement. If this is the case, then Modi has tactfully come out of the clutches of corporate funding during demonetization. While other parties were busy saving their `500 and `1000 notes into their banks, BJP was busy taking advantage of this through ‘land pooling.’ They didn’t lost any penny rather gathered some extra money through its investments ahead of the announcements and hence, creating a fund which may be enough for the party to contest elections till 2019 at least.

Since, the ITR filing and government revenue has gone upward post demonetization; the government has enough funds now to implement the welfare majors that would help the government, especially Narendra Modi to reach out to the downtrodden masses and breaking the BJP’s limitation to forward caste and trader community. This became visible in Uttar Pradesh assembly polls where the party not only won votes from all cross section, it even win hearts of the minorities (though at limited levels). Hence, in coming one and half years, we can expect floods of welfare government majors aimed at creating Indian government a welfare state.


From 2012 to 2016, when demonetization was announced, BJP was the leading beneficiary of corporate funding, reports Delhi-based think-tank Association for Democratic Reforms (ADR) which monitors funding to political parties. The BJP tops the list when it comes to corporate funding of political parties after having received Rs 705.81 crore between 2012-13 and 2015-16 from business houses, says a report. Out of the 5 National Parties, BJP received the maximum donations of `705.81 crore from 2987 corporate donors followed by Congress, which received a total contribution of `198.16 crore from 167 corporate donors in this period of 3 years.

Business houses donated `956.77 crore (89 percent of known donations) to the five national parties during this period, ADR further reports. Major source of funding of political parties comes from real-estate, trusts & groups of companies, as per the report.

All political parties are required to submit details of donors who have made donations above `20,000 in a financial year (between 1st April and 31st March) to the Election Commission of India, every year. Parties provide details of the name, address, pan, mode of payment and amount contributed by each donor who has made donation above Rs 20,000 in their submission.

From 2012-13 to 2015-16, BJP’s and Congress’s voluntary contributions above `20,000 from corporate/business houses are 92 percent and 85 percent respectively. CPI and CPM have the lowest share of corporate donations at 4 percent and 17 percent respectively as per the report.

The maximum corporate donations were received by the national parties in the financial year 2014-15 during which Lok Sabha elections took place. ADR report says that the corporate donations received in fiscal year 2014-15 alone form 60 percent of the total corporate donations received between fiscal year 2012-13 and 2015-16.

The watchdog report says Satya Electoral Trust was the top donor to 3 of the national parties. The trust donated a total of 35 times in 3 years, amounting to `260.87 crore during 2012-13 to 2015-16.  BJP declared receiving `193.62 crore while Congress was the recipient of `57.25 crore of funds from the trust. NCP received `10 crore from Satya Electoral Trust during the same period.

The General Electoral Trust, which was formed before the electoral scheme was launched by the government in 2013, was the second highest corporate donor to BJP and INC. Between fiscal year 2012-13 and 2015-16, the trust donated `70.7 crore and `54.1 crore to the two national parties, respectively.

The real-estate sector was the biggest donor to the National Parties during l 2012-13, contributing a total amount of `16.95 crore to the parties. BJP received the highest contribution of `15.96 crore followed by INC with `95 lakh and CPM with `4 lakh.

Trusts and groups of companies with varied interests in mining, real-estate, power, newspapers donated the highest amount of `419.69 crore to the national parties.

The manufacturing sector was the second highest overall contributor, contributing a total of `123.67 crore to the 5 National Parties. BJP, INC and NCP all 3 received the maximum contributions from trusts and group of companies. BJP received the highest `287.69 crore from trusts & group of companies, followed by INC with `129.16 crore and NCP with `15.78 crore.

ADR report says BJP received the highest donations from all 14 sectors including Real-estate (`105.20 crore), Mining, construction, exports/ imports (`83.56 crore), Chemicals/ Pharmaceuticals (`31.94 crore).

ADR report says political parties reported receiving 262 donations worth `10.48 crore from such corporate entities who have zero internet presence or if they do there is ambiguity about the nature of their work. Interestingly the Contact details of most of these companies were unavailable in cases where they were visible online says watchdog report.

Since, BJP was the biggest beneficiary of corporate funding; it was obvious that it would come at a cost. The cost for this funding was allegation against Modi government of being a ‘suit boot sarkar’ which cares a straw for the poor. In fact, this allegation went up to the level of Modi being ‘proxy’ of corporate/business community, though opposition parties alleging such charges against the Indian Prime Minister were also receiving funds from such corporate and business houses. Hence, through demonetization, when BJP has enough funds to contest upcoming elections till 2019, PM Modi has ensured that there would be no political-corporate cocktail — that leads to scam and corruption charges — taking place in coming two years. Hence, when Modi would go for Lok Sabha Polls in 2019, the opposition won’t have any allegation of corruption neither against Modi nor against any of his cabinet minister.

Hence, through demonetization, Narendra Modi has set the agenda for 2019 Lok Sabha Polls and unknowingly whole opposition parties have walked into that trap by badmouthing Modi’s decision on demonetization. While opposition would chant the public apathy during demonetization, Modi would chest thump for taking decisive step towards few rich elites who had shun away with public money by evading tax meant for welfare of the poor.