Demonetisation anniversary: A political thriller turns two; for a struggling economy, its costs have far outweighed the gains

Not even in their wildest imaginations, Indians would have given a serious thought that more than three-fourth of the currency in the system would vanish overnight–till the evening of 8 November 2016. Even for economists, this wasn’t a likely possibility in the economy. No one thought that any political leadership serious about its future prospects would go for a such a high-risk gamble. But Narendra Modi found a big political opportunity here and presented note ban as the biggest attack on India’s parallel economy ever. India had demonetised notes in the past too, but that was a minuscule compared to what Modi had in mind. Two years ago, on this day, Modi launched demonetisation with three core objectives to begin with–terminating black money in cash, killing fake currency and putting an end to cash-based corruption. The objectives were noble and welcome in an economy where a parallel economy was thriving. The operation itself was unheard of in such a huge scale in any comparable economy. About 86 percent of the cash in circulation vanished in one go when Rs 500, Rs 1,000 notes were declared invalid. Till date, there is no hard evidence that demonetisation achieved any of the three initially stated objectives in the desired manner. On the other hand, the costs the economy had to pay were huge. [caption id=“attachment_4059851” align=“alignleft” width=“380”]  File photo of Prime Minister Narendra Modi and finance minister Arun Jaitley. PTI[/caption] The list of objectives was expanded in the subsequent months after the launch of note ban. From the initial three, the goal was later shifted to digitisation of the economy, which was announced by Modi in one his Mann ki baat programmes. Subsequently, the whole banking system and government machinery was pressed into action to create a ‘cashless’ or ’less cash’ economy. Since then, digital transactions have picked up particularly through channels like Unified Payments Interface (UPI). This was a notable shift in a cash-dominated economy. Surely, cash in circulation dipped in the subsequent months. But cash returned with a vengeance in the period after. The Reserve Bank of India (RBI) data shows that the currency in circulation spiked to Rs 19.6 lakh crore as on 26 October 2018, registering a growth of 9.5 percent from two years ago and compared with Rs 17.9 lakh crore on 4 November 2016, the week before the note ban. Further, ATM withdrawals too have picked up. This further tells us that cash is clearly back and is unlikely to go off the scene in India that is dominated by an informal economy and a cash-intensive labour force. ‘Less cash economy’ remains a dream despite a massive one-off shock treatment on cash. What suffered worst during the attack on cash was the cash-intensive industries and small and medium enterprises (SME), and micro, small and medium enterprises (MSMEs). When cash significantly disappeared from the system for a good three to four months, supply chains took  a major hit and labour force was cut down in many small firms. Things began improving when cash returned to the system but many failed to survive. Reports emerged of several micro-units shutting shop which inevitably meant job losses and, in turn, demand slowdown. The biggest disappointment was when the RBI data showed almost all of the demonetised notes came back to the bank counters. This poured cold water on the initial expectations that a significant chunk of the unlawful money will return and that amount can be put in use for productive purposes in the future economy. The RBI took a very long time to finish the mammoth task of physically verifying and counting the demonetised notes. The RBI governor received a lot of flak for this delay, including from a Parliamentary Standing Committee, in making the information public. Demonetisation was a political move, almost entirely. The RBI had only a secondary role to play throughout the demonetisation episode.While its role in deciding the launch of demonetisation was understandably limited, the unenviable task of implementing the programme was completely entrusted with the RBI. This wasn’t easy for the central bank.

Scores of circulars were issued on various rules and some of them were rolled back. Most of the decisions were taken on the go. The huge public unrest that followed in the later months on account of mega problems in depositing and withdrawing money put the regulator, and the banking system as a whole, in a spot. The mayhem continued for a long time.

Those who criticised the central bank heavily for its handling of note ban included former RBI governor Y V Reddy, and one of the former deputy governors, Usha Thorat. They cited the reputation loss RBI as an institution suffered throughout the whole episode. Politically, however,  demonetisation never proved to be a major setback for PM Modi. The BJP continued its victory run in the subsequent state elections. The Uttar Pradesh assembly polls that followed not very long after the note ban was considered as the litmus test for the BJP on the demonetisation reception. The party achieved a grand victory in the state poll, silencing demonetisation critics. Having highlighted these points, it is unfair only to look at the negatives of demonetisation. Regardless of the tangible results, this was the biggest crackdown on parallel economy modern India ever witnessed and no one doubts the intention of the exercise. Without doubt, this led to a creation of more formalised economy.

Most of the money in circulation can be now traced to the sources and taxmen have a better grip on those who have deposited illicit money in their bank accounts. There is a fear on the ground about getting caught if you deal in unaccounted cash.

The notable positives of the demonetisation include the fact that an increasing number of people are now familiar with digital modes of transactions and the fact thatwe now have a more formalised economy. When seen against the pain it inflicted on the economy, did the move make sense is the larger question. After two years, the Indian economy is largely past the demonetisation impact. Of course, the jury is still out on whether demonetisation was amasterstrokee of the Narendra Modi-government or an economic blunder. But so far, the costs of demonetisation, one can argue, have far outweighed the gains in the economy.