Narendra Modi speech: Enough of rhetoric; where are the hard numbers on demonetisation gains?

The way Prime Minister Narendra Modi has defended his decision to demonetise high value notes in Parliament today makes it sound like note ban was a measure his government had thought through thoroughly before implementing on 8 November in Asia’s third largest economy. Not even his political rivals dispute the fact that demonetisation was a well-intentioned move by the government but executed badly. The idea of rooting out corruption, black money and fake notes with one big blow appealed to all sections— economists, the middle class and the panwallah on the street—in the same manner. During his speech on Tuesday, Modi said. “People asked why did we bring demonetisation into effect when the economy was doing well. As a doctor would say the best time to perform a surgery is when the body is completely healthy.” [caption id=“attachment_3270886” align=“alignleft” width=“380”]  Prime Minister Modi speaks in the Lok Sabha Tuesday. PTI[/caption] Indeed, the economy was beginning to come out of a slowdown phase, 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 (look at the chart below) to suggest that economy wasn’t in good shape when 86 percent of currency was abruptly pulled out of system. That was also a time when this government was grappling with the reforms jinx. GST was beginning to appear as a possibility and the economy was fighting many evils such as a weak banking sector problems, muted industrial activity and decline in private investments. That is when the demonetisation happened. Since then, many economists, including Nobel laureate Amartya Sen, have raised the question as to why the government decided to scrap 86 percent of the currency when only 6-7 percent of the black money was estimated to be in cash. If the idea is to implement a massively disruptive reform when the economy is “doing well”, the government could have perhaps waited. But, that’s a call the ruling dispensation had to take at some point. No matter what the critics say, the fact that Modi finally spoke on note ban in Parliament gives one the hope that the government will also show its willingness in the coming days to share vital information on the gains of this exercise, which is missing until now. Even in the Union budget 2017 last week, the government was largely silent on the demonetisation results. After three months of demonetisation, we still do not know how much black money has been recovered from the hoarders and how many fake notes have been seized since the start of the exercise. The government owes an answer to the common man on the above stated objectives. As of now, all we know is that the demonetisation has been painful for the economy. Most economists have lowered the GDP growth for this fiscal year to 6.5-6.6 percent level compared with the earlier estimates of 7-7.6 percent. 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. As far as the original objectives of black money and counterfeit notes are concerned, it won’t be long before fake note makers ‘recalibrate’ their machines to churn out new currencies and real estate mafia flood the market with cash after lying low for a while. The same will apply to extremist elements, who were equally affected by the cash crunch. But what are the gains? The government has, so far, not 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. Recently, Motilal Oswal, a domestic brokerage, 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 Reserve Bank of India (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. After three months, the demonetisation pain has begun to ease as cash has slowly found its way back to households with ATMs and banks beginning to dispense cash. Now, it is time the Narendra Modi government to move beyond mere rhetoric on demonetisation and present the facts. Prime Minister Modi doesn’t need to explain why he went ahead with the demonetisation process putting the economy and his own political capital at great risk. The intention is well-known. But, what we need to see now is hard numbers on demonetisation gains.