You’ve heard that whatever one says about India, the opposite is equally true? Well, that could equally apply to that 8 pm bolt from the blue that struck Indians on 8 November, 2016 – Narendra Modi’s announcement of the overnight withdrawal of Rs 500 and Rs 1,000 notes.
The debate about whether demonetisation was good or bad will never end because positions taken on it have less to do with economics/ facts/ logic and more to do with whether one idolises or demonises Narendra Modi. Modi admirers will never accept that this may not have been the hugely visionary move they insist it was. Modi haters will never accept that this may not be the unmitigated disaster they insist it was.
But the truth, as the cliché goes, lies somewhere in between. Both the DeMo Detractors and DeMo Defenders have it right on some counts and wrong on others. So let’s look at some of the diatribes against, and justifications for, Modi’s big gamble.
Caution: There’s going to a lot of `buts’ and `howevers’ being used, so those wanting only cheers or only jeers can stop reading from this point on.
Defence: Demonetisation was a surgical strike, no less, on black money and corruption. This has been the primary defence.
Criticism: Nonsense, this was just a government-backed money laundering scheme; demonetisation was an epic failure.
Did the surgical strike work? It did, to the limited extent that it pulled out the existing stock of Rs 500 and Rs 1,000 notes stashed in bank lockers and steel almirahs or hidden in countless other innovative ways. But, hold on. Not all of this was black money. Some of it was perfectly legitimate cash kept at home for emergencies, by small businesses for working expenses and deposits held by genuine cooperatives and micro-finance institutions. Problem is, there is no way of knowing the how much of the cash was legitimate and how much was illegitimate.
Modi had said in his 8 November speech: “The 500 and 1,000 rupee notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper.” That did not happen – 98.7 per cent of the Rs 15.44 lakh crore worth of demonetised currency has come back into bank accounts. So, clearly, even the illegitimate money ended up becoming legitimate.
A 31 October government press release claims “the Government had expected all the SBNs to come back to the Banking system to become effectively usable currency.” No it didn’t. Attorney General Mukul Rohtagi told the Supreme Court in December 2016 that the government expected Rs 10-11 lakh crore to return. That means the government expected 30 percent of the demonetised currency to not come back; instead only 1.3 percent did not. Even the Defenders were confidently asserting, till the RBI put out data, that 20 percent cash would not return.
Of course, there’s also the issue of how much black money is held in the form of cash. So this round goes to the Detractors.
But the Defenders, too, have a point - the fact that illegitimate money has come back does not necessarily mean that it has been legitimised. A 31 August Central Board of Direct Taxes (CBDT) press release claims that based on data mining post demonetisation, there has been a 38 percent increase in admission of, and a 44 percent increase in detection of, undisclosed income, apart from more than a doubling of searches and seizures. And then, 2.24 lakh shell companies found laundering money have been closed. Sure, there is the larger point about a coercive state, tax terrorism etc but that’s a different debate altogether.
However, the Defenders have not been able to give a convincing answer to the question: if this was all about attacking black money why was the Rs 2,000 note – which would have made storage of black money easier – introduced and made available faster than the new Rs 500 note? The explanation that this was an interim arrangement to put spending money in people’s hands does not hold even a drop of water. A Rs 2,000 note is hardly something that could easily be used for daily transactions by the vast majority of people.
As for corruption, which leads to generation of black money, it can’t be ended in one surgical strike. It requires sustained trimming of the powers of the state. Is this happening? Really?
Criticism: Demonetisation has dealt a body blow to the economy, forced several thousands of small businesses to shut down and thrown lakhs of workers out of jobs.
Defence: The disruption to the economy was expected, is temporary and not as bad as is being made out. Demonetisation is only aiding the formalisation of the economy.
The Detractors have a clear upper hand in this argument and the Defenders know it. Authoritative data on both informal sector enterprises and employment come with huge lags, but the anecdotal evidence is too compelling to dismiss. The debate can only be on the extent of the disruption.
The informal and much of the small and medium sector transact mostly in cash and demonetisation threw them completely out of kilter, forcing many to shut shop at least temporarily. The best defence the Defenders could come up with was this will boost formalisation of the economy. That won’t wash – could there not have been less painful ways of pushing formalisation? In this paper , V Anantha Nageswaran and Gulzar Natarajan stress the need to address “the underlying reasons for staying informal” - the cost of doing business, onerous regulatory compliances and lack of access to finance. Till there is credible action on these fronts, the demonetisation-was-meant-to-push-formalisation line will be met with skepticism.
On job losses, the only authoritative data is the quarterly survey of the Labour Bureau, which showed that 1.13 lakh casual workers in the manufacturing sector lost their jobs the October-December 2016 period. The data is not broken up month-wise, but it is safe to assume that the bulk of the losses would have happened in November and December. October would have been a busy month, given the festival season. Besides, this survey covers only the formal sector. A survey by the Centre for Monitoring Indian Economy shows that employment fell 1.5 million (15 lakh) in January-April 2017 to 405 million from 406.5 million in September-December 2016. The two surveys are not comparable but the point about job losses is a real one.
Defence: Demonetisation has brought about behavioural change – (a) people are becoming more tax compliant; (b) they have taken to digital payments in a big way.
The CBDT press release says for 2016-17 as of June 30, 2017, 1.26 crore new taxpayers were added to the tax base. Minister of state for finance Santosh Gangwar told Parliament, in response to a question, that the tax base at the end of March 2017 was 10 percent higher than in March 2016, against a 8 percent increase between March 2016 over March 2015.
The CBDT also says that the total number of returns filed during 2016-17 was 17.3 percent higher than in 2015-16. The key, however, will be the number of returns filed in 2017-18 (for income relating to 2016-17). As of now, only data relating to e-filing up to 5 August is available and this shows a 25 percent increase. The government wins this round, if only because it alone has access to information.
What of the rise in digital payments? The acrimonious battle of numbers on this between Defenders and Detractors – involving month-on-month versus year-on-year comparisons, what transactions to include and exclude - requires a separate article in itself, but suffice to say that yes, there has been an increase in digital transactions post-demonetisation and, yes, it appears to be tapering off. This article gives some sense on numbers . Digital transactions do, however, have a slight edge but whether demonetisation played a decisive role is a matter of debate.
Defence: Demonetisation has broken the back of militancy. A 30 August government press release claims “terrorist and Naxalite financing stopped almost entirely. No high quality FICN was found/seized by intelligence operations, including at the Indo-Bangladesh Border since demonetisation. Further, it also adversely affected the hawala operators and dabba trading venues.”
The note ban did initially affect militancy in Jammu and Kashmir and the Naxalite-affected areas but not for long. The respite was temporary and what needs to be noted is that home minister Rajnath Singh, in his three year anniversary interactions, dwelt more on the actions of security forces than on militants’ access to finance or lack of it. The data in the Home Ministry’s annual report data ends with 2016, so this is another area where government claims cannot be contested. As for counterfeit currency, the bland statement about none being seized contradicts numerous reports about fake currency seizures by police and security forces from across the country.
It’s clear that the Defenders win on some counts and the Detractors win on others. The first lot says the gains from demonetisation is worth the pain, the second lot says it is not. The real question is: could whatever good demonetisation brought in its wake have been achieved by other means? Perhaps it could. But this is something that cannot be undone now. It can only serve as a lesson for future governments.
Catch all the developments on the demonetisation anniversary day here.
Updated Date: Nov 08, 2017 10:17 AM