Losses from demonetisation are huge, gains vague; NDA govt should gracefully accept setback a la Virat Kohli and ISRO

In 2001, India's space programme suffered a huge setback when an ambitious heavy satellite rocket failed to take off from Sriharikota on its first mission. Scientists at the Indian Space Research Organisation (ISRO) did not claim success on the ground that their team had worked hard. They simply went back to the drawing board only to bounce back with a dozen successes of the GSLV, one more setback and then to a point where India is now coolly talking of a manned space mission, Gaganyaan, by 2022.

When India's cricket team tumbled to a shameful defeat by 159 runs at Lord's this year against England, Virat Kohli made no excuses for his biggest setback in the captain's role.

"We deserved to lose," Kohli said. He put the second Test behind as a lesson learnt and the team hit back with a 203-run victory in the third Test at Nottingham.

India's NDA government and its chosen bureaucrats may like to learn a thing or two from its scientists and sportspersons: It is better to accept a setback gracefully, own up the risks, pick up lessons and work towards the next big goal. Alas, the latest assertion by the government that its controversial move to demonetise Rs 500 and Rs 1,000 currency notes in November 2016 has met its objectives sounds hollow after the Reserve Bank of India (RBI) decisively announced in its annual report this week that 99.3 percent of the banned notes found their way back into the State's vaults.

There has been a shifting of goal posts by the government along the way, and it is clear from the final scoreboard that there has been no windfall for the taxman. No Bollywood-style "hands up" moment where those with black money were caught red-handed with their stash of loot.

Queues outside banks after demonetisation was announced on 8 November 2016. PTI

Queues outside banks after demonetisation was announced on 8 November 2016. PTI

The demonetisation exercise cost Rs 8,000 crore while the money that did not come back amounted to Rs 10,720 crore. But that is no profit, because there were many more costs to the gamble to retrieve black money than the working expenses. Let's not forget that the RBI actually paid a dividend for the 2016-17 fiscal year ended June that was less than half of what it paid out in the previous year. In absolute terms that was Rs 35,221 crore less.

There was also a sharp increase in reports of counterfeit notes during the demonetisation period - involving 322,000 such instances. The administrative costs of such an exercise should be considered in any cost-benefit analysis.

An unintended gain -- but one that came at the cost of squeezing farmers and rural traders -- was a temporary decline in the prices of vegetables and pulses in the aftermath of the currency squeeze, but it ended up hurting vulnerable sections of the society. As industries applied the brakes on new investments, there was also a future growth cost to demonetisation.

India lost its status as the world's fastest-growing economy in the quarter that followed demonetisation, when GDP growth slumped 6.1 percent year-on-year in January-March, 2017 from 7.6 percent in the year-ago quarter -- and a full percentage point below what the government's own statisticians had estimated. For the full year, India's GDP growth fell to 7.1 percent from 8.2 percent, adjusted for inflation. In nominal terms, GDP at current prices for the year 2016-17 was estimated at Rs 152.54 lakh crore, up from Rs 137.64 lakh crore in 2015/16. On rough calculations, that means that the income lost in the January-March quarter was about Rs 3,750 crore.

The government's claims that the tax base has been widened, formalisation of the economy has been boosted and there has been a sharp fall in counterfeit notes in circulation are all in the fuzzy, futuristic zone. Claims of a fall in terror funding are essentially non-proveable in nature and smack more of politics than economics.

We have no meaningful data to show a growth in government coffers, even as a figure of Rs 300,000 crore is being bandied about as the amount of potential black money that found its way back into the banking system, waiting for the taxman's noose to tighten.

In a nation where clever accounting, pliable bureaucrats and the lack of hard evidence in courts are an everyday reality, we will believe it when we see it.

The State Bank of India expects  Rs 30,000 crore in new tax revenue in the current fiscal from an estimated 2 crore new taxpayers. But that rests on a pile of assumptions. Former finance minister P Chidambaram's claim that demonetisation turned out to be a money-laundering exercise may be taken with a pinch of salt -- with the realisation that a new class of middlemen may have gained from payouts in laundering commissions.

The hard truth so far, as one television headline put it pithily, is that jugaad triumphed over notebandi. India's famous tricksters with their makeshift innovation techniques have used everything from front men in queues to more sophisticated benami methods to corner the government. In hindsight, the Narendra Modi government may realise that the failure of demonetisation is the victory of an established culture of labyrinthine business practices over the capacity of law enforcers to shock and awe.

Perhaps it is time for the Union Cabinet to invite cricketer Virat Kohli for a friendly session on how to accept setbacks gracefully -- and aim for the next big victory.

(The author is a senior journalist. He tweets as @madversity)


Updated Date: Aug 30, 2018 14:14 PM

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