On November 8, 2016, Prime Minister Narendra Modi announced his decision to deprive Rs 500 and Rs 1,000 currency notes of their “legal tender” status and removed them from circulation. These notes accounted for 86 per cent of the total value of the currency with the public. By any measure, the PM’s decision was incomprehensible and, in view of its adverse effects revealed subsequently by the Economic Survey 2016-17, the annual report of the Reserve Bank and other reliable sources, demonetisation turned out to be a monumental failure.
The PM had three objectives in mind: Flushing out fake currency, attacking terrorism and, most importantly, flooding out black money. None of these was fulfilled. For instance, as the RBI revealed, fake currency worth only Rs 41 crore was found out. This was contradictory to the estimates of about Rs 4-5 lakh crore given by Mukul Rohatgi, the then Attorney General, in the Supreme Court on November 23, 2016. Terrorist activities are far from controlled, let alone eliminated.
There cannot be two opinions that the monster of black money has, over a period of time, grown in strength, eaten into the socio-economic and political fabric of the country, and, therefore, needs to be attacked lock, stock and barrel. This has not even been attempted in India for one reason: An absolute lack of political will from the ruling establishment. Overwhelmed by PM Modi’s objective of eliminating black money, the common people tirelessly stood in queues for hours to deposit their cash in the banks and virtually begged to withdraw meagre amounts for everyday activities. This chaos continued for six to seven months. But soon the people were to be disillusioned.
In March 2017, the RBI revealed that currency notes worth Rs 15.28 lakh crore or 99 per cent of the total 15.44 lakh crore was deposited in banks. Thus, the objective of attacking black money fell on its head. In fact, as experts argue, black money constitutes about 25 per cent of India’s national income (GDP). If this ratio is applied to the cash deposited in the banks (Rs 15.28 lakh crore), then, it turns out to be about Rs 3.82 lakh crore. Thus, far from attacking black money, I venture to argue that demonetisation allowed the culprits to convert Rs 3.82 lakh crore into “white” money.
Realising that demonetisation was failing, Finance Minister Arun Jaitley immediately shifted its goal to creating a “cashless economy”. When about 80 per cent of the country’s economy is “informal”, this is ridiculous. Even the most advanced economies use a considerable amount of cash. Anyway, as an economy progresses, the use of cash tends to reduce. Statistics in the EPW show, as on September 29, the currency with the public was worth Rs 14.96 lakh crore — Rs 1.21 lakh crore (8.8 per cent) less than on November 8, 2016. What a miraculous journey towards a cashless economy.
The government shifted, once again, to the unintended goal of “digitisation”, that is, transactions through electronic devices such as mobile, BHIM-UPI, debit cards, M-wallets, e-payments etc. But what is the reality? The number of digital transactions increased from 102 crore in October 2016 to 156 crore in March 2017 but thereafter, continued to steadily decline, so much so that they fell to 138 crore in August.
Jaitley, meanwhile, claimed an increase in IT returns as an achievement of demonetisation. The FM would have known that in 2011-12, IT returns had increased by 80 per cent and in the next year by 30 per cent. Again, this time, of the increased returns, about 70 per cent are filed by those having an income less than Rs 5 lakh per annum. Taking into account the exemption limits and other provisions, the addition to tax collection would be negligible.
When 86 per cent of the total value of cash was withdrawn from circulation, the economy was bound to suffer. Of the three main functions of money, the “transaction” function (others being “precautionary” and “speculative”) keeps the economy moving and growing, mainly through the exchange of goods and services. The government issued Rs 2,000 currency notes. As per RBI data, on March 17, of the total 10,029.3 crore currency notes, Rs 2,000 currency notes constituted only 3.3 per cent but they accounted for 52.2 per cent of the total value. These high denomination notes lacked transaction value, which paralysed the mainly cash-dependent informal economy.
Demonetisation brought economic transaction and exchange to a standstill. This affected growth. To be fair, demonetisation did not initiate the “deceleration” of growth that began from April 2016. But it certainly hastened the deceleration to a meagre 5.7 per cent in the first quarter of the current financial year. Even for the current fiscal, the rate of growth is being revised to 6.7 per cent as against the initial projection of 7.3 per cent, thanks to the complementary effect of the unmindful and disastrous implementation of GST.
Further, about 80 per cent of the informal economy — mainly comprising micro, small and a large part of medium enterprises, small and medium traders, and through that, low-paid, contract workers — was badly hit. This significantly affected employment. During January-April 2017, about 15 lakh jobs were lost mainly due to demonetisation. Now the GST has added to the woes. As the latest 2016 Employment-Unemployment Survey shows, the country was already facing “jobless growth.” The latest Economic Survey shows that in North India, demand for MGNREGA increased by 30 per cent. The government’s promise of creating two crore jobs annually has withered away.
To conclude, demonetisation failed and failed miserably. It adversely affected every sector of the economy and every section of society. Since the Opposition parties condemned November 8 as a “black day”, the government celebrated it as “Anti-Black Money Day”. The government must be complimented for celebrating a monumental failure as a stupendous victory.