A 100 days have passed since Prime Minister Narendra Modi announced on 8 November around 8.30 PM that Rs 500, Rs 1,000 notes will not be valid from that midnight, surprising (and shocking) a good part of the 125 crore Indians watching the televised speech. Some praised the move while some others questioned, but all rushed in panic to stand in queues before ATMs/bank branches to either withdraw or deposit money, an activity that became routine in the next two months that followed.
None questioned the stated intention—killing black money and counterfeit notes and rooting out corruption from the societal psyche. A total of 86 percent of the notes in circulation was invalidated in the demonetisation exercise, which was predominantly a government action, in which Reserve Bank of India (RBI) only seemed to take part as a facilitator, rather than a decision maker or a monetary authority.
The execution of the plan was rather poor, giving misery to millions of Indians and even gradually weakening the support-base the PM enjoyed in the initial days of note ban. Frequent flip-flops in rules (the RBI issued some 60 circulars making and later changing the rules on note ban), the cash-crunch induced slowdown in the economy, the impact on ground-level economic activity and job losses dominated discussions more than the gains of demonetisation for most part of the last three months. As noted economist and former JNU professor, Arun Kumar writes in his book--‘Understanding the black economy and Black money in India’--only about 22 percent adults in India has access to internet and 17 percent to smart phones, limiting their ability to shift to online financial transactions. At the same time “it is unlikely that black marketeers and other generators of black money will suffer because the biggest fish were able to quickly convert whatever black cash they had into white,” Kumar writes.
As demonetisation turns 100 today, there are more questions than answers with respect to PM Modi’s demonetisation move.
Let’s take a look at the critical ones:
The original targets
The shot fired from PM Modi’s gun on 8 November had three main targets--black money, fake currency and corruption. More targets were added later, such as creation of a cashless economy, curbing real estate prices and, of course, the long-term target of broadening the tax-base with the taxmen now able to track more people who returned their invalidated notes in the banks. How far the government has achieved these targets?
In his book, Kumar says PM Modi miscalculated the idea of black money from the very beginning and demonetisation was no way a remedy to curb black money in the economy. “The objectives of the government were laudable, but it seems as though the scheme was imposed on the country with little or no forethought,” Arun Kumar writes in his book.
Elaborating his point, Kumar writes that it must be understood that the black money the government was targeting is only about 1 percent of the black wealth held in the country and only 3.5 percent of the black income generated in 2016. “Even if the government managed to suck out all the black cash in circulation, it would not have much effect on the black economy which involves various activities in which black incomes are generated. It does not stop these activities from continuing,” Kumar writes.
Certainly demonetisation hasn’t been a success to check fake notes. Since 8 November, there have been several cases where counterfeit notes in newly introduced denominations were seized. One such latest report in the Hindustan Times tells us that fake Rs 2,000 bills are entering India through Bangladesh.
The report quotes former Intelligence Bureau special director and former chief of Sashastra Seema Bal, Arun Chaudhary, as saying “It was just a matter of time that they copied the new notes”. The HT report further cites preliminary inquiries by the BSF to say that perpetrators have managed to copy six front features —including the see-through register where the numeral 2,000 can be seen when held against light; the Devanagari inscription, portrait of Mahatma Gandhi, and the Ashoka pillar emblem.
As for ending corruption through note ban, this wasn’t even an accepted idea from the start since cash makes up only one form of bribery. In his book Arun Kumar concludes that demonetisation was hardly a pill to cure black economy. “Only a small amount of the black money would be affected by demonetisation… much of the money that was demonetized was not black cash.”
The impact on the economy on account of note ban was severe as macroeconomic data suggests. Even here, the full impact will never get captured yet since data on a large section of informal economy that took the major hit, in the form of job losses and loss on business, doesn’t typically come up in the calculations, thanks to inadequacies in the data gathering infrastructure. But reports suggest that there have been massive job losses in the informal sector and this has contributed to the already high unemployment levels that is currently at 5 percent. Industrial activity has slowed down, bank credit growth has plunged to multi-year lows.
Both the government and private agencies have lowered the growth forecasts factoring in demonetisation, the most pessimistic outlook coming from IMF which expects the growth to slow to 6.6 percent this fiscal year. Government’s economic advisor too has largely agreed to this view, so is the RBI, but all agencies pin their hopes on an economic rebound after the slump. But there aren’t any signs of that as yet.
The December IIP numbers (a contraction of 0.4 percent) show that the major shock came from a large drop in the manufacturing sector growth, a contraction of 2 percent, and a bigger shock from a 3 percent contraction in the capital goods segments (which indicates trends in investment activity) as compared with 15 percent growth in the preceding month. The contraction in economic activity was visible also in other key segments such as consumer goods and durables as well. It might take a few more months for the demand revival to happen leading to a growth pick up.
Most economists agree on the near-term impact on the economy while none is certain how long the impact will last. The confused lot also includes even the MPC (monetary policy committee) which sets the interest rates in the economy.
Question on timing
PM Modi has strongly defended the timing of note ban saying an operation can be performed only in a healthy body. “When can you have an operation? When the body is healthy. The economy was doing well and thus our decision was taken at the right time," Modi said in Parliament.
Certainly, things were looking up in the economy last year with positivity returning to the system and hopes of big reforms (GST) finally turning a possibility, but certainly it wasn’t in the pink of health. The PM’s contention that the operation could have been performed only when the body is healthy is questionable given that there is enough evidence (low bank credit growth, weak exports, industrial activity and global uncertainty) to suggest that economy wasn't in good shape when 86 percent of currency was abruptly pulled out of system.
What are the gains
As this writer noted in an earlier article, the government hasn’t given any estimate of how much unaccounted cash is recovered from the exercise and how many fake currencies have been confiscated. On 8 November, the government had demonetised Rs 15.44 lakh crore currency in circulation, out of which majority has come back. This ended the expectation that a good part of the black money in cash will be extinguished out of the banking system.
Some private agencies have come with certain estimates. One such is Motilal Oswal, a domestic brokerage, which said that the government may gain only Rs 72,800 crore from the move — taxes, penalties worth Rs 32,800 crore and Rs 40,000 crore by way of surplus transfer from the RBI. As per the brokerage’s estimates, the income tax department may be able to unearth only Rs 28,500 crore as black money, representing 50 percent of the income considered to be declared under the Pradhan Mantri Garib Kalyan Yojana scheme. This would imply tax receipts amounting to Rs 24,200 crore. If these numbers are to be believed, the question arises was all the pain for a large section of people worth for such a not-so-significant gain?
After 100 days of demonetisation, there are more questions than answers on the note ban—both on the impact and the gains. Someone in the government owes an answer on the rationale of the dramatic, drastic move, not using rhetoric but with supporting evidence.
Published Date: Feb 16, 2017 11:18 AM | Updated Date: Feb 16, 2017 11:46 AM