30 days of demonetisation: Parliament comes to standstill but not the nation

A week is a long time in politics but a month is not in the relatively laid back and rarified world of economics. Yet, demonetisation of high currency notes on 8 November 2016 has elicited a flurry of comments and analysis on completion of a month of its announcement given perhaps the short time– -50 days—the government gave itself to smoothen out the rough edges inevitably expected to be left by it. That 86 percent of the currency notes in terms of value were rendered useless in commercial transactions gave rise to the apprehension that the economy will come to a standstill given the fact cash lubricated large parts of the economy especially the unorganised sector or SME and farming. No less an authority than the Apex Court darkly hinted at the approaching apocalypse– - there would be riots in the country if cash was not made available. The former Prime Minister Manmohan Singh while terming the exercise as monumental mismanagement also discounted its long term importance. [caption id=“attachment_3146572” align=“alignleft” width=“380”]  Representational image. PTI[/caption] Yet, nothing catastrophic has happened. If anything, the nation has, by and large, accepted it as something in its long term interest. Indeed the nation has braved the small pinpricks in anticipation of larger gains in the long run. The RBI announced on 7 December 2016 that as much as Rs 11.5 lakh crores of Rs 500 and Rs 1,000 demonetised notes have found their way into the banking system as against Rs 14.8 lakh crore believed to be in existence at the beginning of the exercise. Detractors call this a single most failure of the scheme. Their index of success was the smallness of such notes entering the system so that the notes not entering the system by 30 December 2016 would go up in smoke. In other words, a large chunk of black money would have ceased to exert its pernicious influence on the economy. This is a pessimistic worldview. The optimistic one is a large chunk of the black money has entered the mainstream that would have a multiplier effect leading to greater GDP in years to come. The catalogue of beneficial effects of demonetisation is: 1) Breaking the back of terrorists organisations especially the Pak backed ones that thrived on counterfeit Rs 500 and Rs 1,000 notes minted in Pakistani official mints; 2) Surge in bank deposits that would mainstream the economy like never before. Many bank branches are witnessing frenetic deposit of the demonetised notes often on the back of opening of fresh accounts. Indeed the unbanked are having no choice except to fall in line; 3) Surge in swiping machines on the retail landscape with 10 lakh such machines all set to get added to the system by 31 March, 2017 against the existing 14 lakh such machines. This too would mainstream the economy; 4) Leg up to digital and mobile banking. Mobile banking and e-wallets have registered a quantum jump in registration and activity since the announcement of demonetisation; and 5) A stiff price would be extracted from the black money deposited. The government is all set to notify a partial amnesty scheme under which those voluntarily admitting to having deposited black money would be let off with a 50 percent tax plus penalty as opposed to 85 percent on recalcitrant ones when caught. Like they say the catalogue cannot be one sided. But the flipside is all about inconvenience and hardships some of which are: 1) Rural India experiencing cash crunch. But reports says this has not affected rabi sowing activity; 2) People having to idle away their time by standing in long and serpentine ATM queues. This was inevitable in an operation of this scale but the queues are shortening by the day and hopefully should be back to normal. Already Rs 4.5 lakh crore of fresh notes have been put back into the system according to the RBI in a month; 3) Private hospitals turn away patients not paying in cash unless they have insurance. This genuine concern indeed could have been addressed by permitting banks to release the amount on production of genuine hospital proforma invoices; and 4) Cassandras are predicting a 2 percent fall in the GDP in the current fiscal year. Without quibbling about the percentage, one can take heart from the heightened economic activity the surge in bank deposits are going to lead to in none too distant a future. What is lost in swings would be more than made up in the roundabouts.