Demonetisation one month: Gains of PM Modi's currency crackdown will be known only in the long term

It’s been a month now since Prime Minister Narendra Modi’s address to the nation socked almost every Indian in the guts and once again polarised opinion like never before. The sudden demonetisation of Rs 500 and Rs 1,000 notes turned out to be one big leveller - people with a few hundreds and a few thousands in cash were in the same plight as those with a few lakhs and a few hundred crores. Overnight the money in their hands (or lockers) was rendered useless. Commentaries in newspaper columns, news websites and social media platforms took up either of two extreme positions – the demonetisation advocates (DAs) insisted this was the best thing to happen to the country and the demonetisation detractors (DDs) outraged that this was the worst thing to happen. At least the DAs agreed that the demonetisation exercise could have been better managed; the DDs set refused to concede anything at all (let’s not even get into the hysterical hyperbole that this group resorted to). [caption id=“attachment_3137758” align=“alignleft” width=“380”]  Prime Minister Narendra Modi. PTI[/caption] One month on, how has demonetisation played out? What has it achieved? The latter question is a bit tricky, since we don’t exactly know what prompted the move. And that’s because the government itself keeps talking about different goals. Initially, it was supposed to be about getting out black money. Modi’s speech and the government’s initial defence of the move only talked about attacking black money. Then it was about tackling the problem of fake notes and terror funding. And soon it was about readying the country to move to cashless transactions. The DDs were quick to challenge the black money narrative. Only a small amount of black money is held in cash; the rest is in real estate and gold; why not go after that, they said. The first point is factually correct (even the DAs concede this); the second question betrays churlishness. To say that it is pointless going after black money held in cash until all black money held in physical assets is confiscated deliberately obfuscates the point that it is the former that facilitates the acquisition of the latter. The overnight strike on black money held in cash will render other transactions more difficult. That said, it is not clear how much of black money held in cash has come into the system. Latest figures indicate that as much as Rs 11.5 lakh crore has been deposited in banks since November 8. But all of this will not be concealed income; it could well be cash held by honest individuals and institutions for perfectly valid reasons. Besides, the State Bank of India economic research team has pointed out that this could include some double counting as well as deposit of legal tender (valid notes of lower denominations). The real picture of how much of the old currency has been brought back (cash in circulation as of 8 November is estimated at Rs 15,441 billion) will be known only in January; how much of this was black money will perhaps never be known. A lot of the black money could well have been laundered in the past month. There was, for example, a huge surge in gold purchases on 8 and 9 November. Zero balance Jan Dhan accounts are now flush with cash – according to this report , Rs 21,000 crore has been deposited in these accounts after 8 November. The deposits have been waning after the government issued warnings. The demonetisation exercise also spawned a black market in new notes. People exchanged their old notes for new and put it right back into their lockers. The exchange rate for old notes was in the range of 30-45 per cent and is reported to have come down to 25 per cent after the second Income Declaration Scheme of 30 November. The response to this second IDS will give some sense about how successful the demonetisation exercise has been in unearthing black money. What will also be difficult to estimate is how much the exercise has helped in curbing terror funding. There has been some success – extremist groups in Kashmir, the Naxal belt and the north-east were suddenly left with no legal tender – but there are also reports about Naxal groups forcing people to deposit old currency in their own accounts and of new currency finding its way to the north-east. If the purpose of demonetisation was to push cashless transactions, that seems to have met with a fair degree of success. Debit and credit card payments, use of e-wallets and mobile wallets as well as prepaid cards have all surged. Whether this is because of the temporary cash crunch or will result in behavioural change will be clear only later. Never mind the rationale for it, how has demonetisation played out on the ground? Even the most ardent of DAs finds it hard to deny that the implementation has been messed up. Modi asked people to put up with 50 days of inconvenience, but there are enough indications that the inconvenience could last longer. Despite the Reserve Bank of India asserting that 196 billion pieces of currency have been put into the system – equivalent to three full years of supply – banks and ATMs do not have adequate cash. Individual bank branches are setting their own limits on cash withdrawals. Salary payments in cash have been affected. At his press conference after the quarterly review of monetary policy, RBI governor Urjit Patel asked people not to hoard new currency. But given how rules on exchange of old currency and withdrawal of cash have been changed almost whimsically, people are holding on to whatever little cash they have till the situation eases. As a result, spending has been compressed and economic activity has been disrupted. The small and medium sector has been affected the most. The fear of job losses is a real one, though the extent may not be as high as the guesstimate of many DDs. One set of DAs pooh-poohed initial estimates of how much of a hit the economy would take, but have quietened down with the RBI lowering its growth estimates for this year to 7.1 percent. NITI Aayog vice-chairman Arvind Panagariya has admitted in this interview that 8 percent growth will perhaps now not be possible before the end of 2017-18. Will the pain of the demonetisation exercise be worth the benefits it will bring? That will depend on a lot of things. The fight against black money will be fruitful only if the government starts acting against benami transactions and properties, reduces tax rates and eliminates scope for corruption (the market buzz is that the majority of those who went on a gold shopping spree after Modi’s shock announcement on 8 November were either tax officials or policemen!) Cashless transactions will get going only if the digital divide is truly bridged and connectivity issues addressed. All this will be known only in the long-term.  No, we may not all be dead by then.