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A Year of Demonetization: Which way is the balance tilted?
November 8, 2017 was a historic day and a day of juxtaposition- the ruling party decided to celebrate the day as ‘anti-Black Money Day’ while the Congress, All India Trinamool Congress (TMC), Aam Aadmi Party (AAP) and five left parties including CPI (Marxist) and CPI, decided to boycott the day as ‘Black Day’ or ‘Cheat Day’. All this stemmed from that one announcement by Prime Minister Narendra Modi-led government on November 8, 2016 (a year ago) stating that the Rs.500 and Rs.1,000 currency notes in circulation then will no longer be considered as legal tender, except for certain specified purposes for a certain time period, after which they will completely cease to be of value. This was popularly called ‘demonetization’.
This piece analyses where this policy stands after one year of its implementation, and what is the way ahead.
Objectives behind demonetization
Demonetization was done with a view to achieve multiple objectives: curbing money laundering, detecting hoarders of black money and bringing them to book, tackle the menace of circulation of counterfeit currency doing the rounds in the market, reducing/eliminating sources of terror funding, and in turn, pushing India in the direction of a more formalized and cashless, digital economy.
As with most policies, the objectives were sound and meritorious at the core. However, the trajectory post-demonetization may be called chequered at best.
Political Perspective
The ruling party has extolled the virtues of demonetization. The list of ‘benefits’ that have accrued post-demonetization, as outlined by the government, include:
• It was India’s highest unearthing of black money, for instance, cash deposits of Rs.3.68 lakh crore in 23.22 lakh accounts is under suspicion, 17.73 lakh cases were found where cash transactions did not match the tax profile;
• It dealt a blow to terrorism and Naxalism, for instance, stone-pelting instances in Kashmir reduced by 75%, incidents of Left-Wing Extremism came down by more than 20%, and 7.62 lakh counterfeit notes were detected;
• India’s financial system was cleansed of many maladies, for instance, mazes of shell companies dealing in black money and hawala transactions were unearthed, and 2.24 lakh companies were struck off by the Registrar of Companies for not being in compliance with the law;
• The tax base of the country witnessed a surge by 26.6%;
• The number of digital transactions increased by 58% this August as compared to the numbers of August, 2016;
• The economy was pushed in the direction of formalization and better employment for the poor, for instance, due to low cash supply there was direct transfer of salaries in the workers’ bank accounts, and 1.01 crore employees enrolled with the Employees’ Provident Fund Organization (EPFO).
The other parties, however, have strongly condemned demonetization, pointing out that it has resulted in a massive slowdown in our growth rate, decreased the Gross Domestic Product (GDP) forecasts of the country by several institutions, including the World Bank (WB) and government data itself (from the Central Statistical Organization), resulted in job losses for the already struggling informal sector workers, putting small businesses in a soup, forcing many of them to shut down.
Financial and Economic Perspective
Demonetization did result in drastic changes in the economic and finances of the country, in more ways than one, both good and bad. While the number of people opening bank accounts and depositing money shot up, simultaneously the number of fake accounts, people misusing Jan Dhan accounts of poor people to deposit extra ‘hoarded’ wealth came up.
Further, since the amount deposited in banks increased, the banks had greater reserves of cash in simple terms, which means that they had more money to lend, and in order to encourage loan growth, the rates of interest on loans also decreased.
The tax base, in terms of the number of people paying tax, increased as did the number of users of the e-return filing system. The narrow tax base of our country has often been cited as a concern and a major reason for why we are not able to capture ample revenues through direct taxes, and the inequality in holding of wealth that is evident in the country.
While the number of digital transactions may have increased, the infrastructure to support them is still deficient. For instance, trying to buy piecemeal items from the local store (where there is no Point-of-Sale (PoS) machine installed) has been rendered difficult.
Another factor was the push for a cashless economy that is more efficient than one operating on High Denomination Notes (HDNs). However, according to data from the Reserve Bank of India, currency with the public, which was growing at 14.7% on a year-to-date basis till June, gained momentum from July- the month when the Goods and Services Tax (GST) was introduced. Between March 31 and October 27, currency in the hands of the public grew 22.5% as compared with 6.6% a year earlier. Apart from GST, the remonetization process is another factor that may have resulted in restoring and enhancing the cash holding with the public. About 90% of the currency of the pre-demonetisation levels has come back into circulation. Effectively, this means that the gradual move towards a cashless economy, may, in fact, have been reversed.
Social Perspective
The HDNs that were ‘demonetized’ constituted approximately 86% of the currency in circulation. The suddenness with which this move was announced and implemented rendered a huge void in the cash repository of households and businesses. Furthermore, as regards access to the new currency that was introduced, there were instances of corruption and exploitation. As to the former, some people claimed to have ties with banks and promised to either convert the ‘black money’ to ‘white’ for the rich or to bring the new currency to them, without them having to go through the struggle of going to the bank or standing in the serpentine queues in front of the ATMs. As to the latter, the situation in front of ATMs (many of them not being able to dispense adequate cash), resulted in people paying the poor to stand in queues on their behalf.
No doubt that many of the black-money hoarders were caught, fraudulent companies tracked, deposits increased, but there can be no denying that the move wiped out small businesses that either could not afford the sudden move towards digitalization or were left with no capital or reserves to sustain the business. The domino effect of this shutting of businesses was the unemployment of many workers. The unorganized or informal sector contributes about 40-50% to the Indian GDP and is responsible for livelihoods of 80-90% Indian workers.
Conclusion
Some of the pros and cons of the demonetization issue have been laid bare above. It may or may not be the ‘right’ time to judge the policy for what it is, considering that it has only been a year, and any such drastic move (coupled with the GST) will take time to bear fruit or the nature of the devil will reveal itself (one hopes not) in due course of time.
