Demonetisation was no rash call; we missed the many hints months earlier

It would not be incorrect to assume that the government had been toying with the idea of demonetisation from as early as February 2016

THE RISE OF GOLIATH: TWELVE DISRUPTIONS THAT CHANGED INDIA
Author: A K Bhattacharya
Publisher: Penguin Random House
Pages: 360
Price: Rs 699
 

Hours before the prime minister’s scheduled address to the nation on 8 November 2016, a high-level meeting took place at the prime minister’s office. When the government put out an advisory at around 7 pm that the prime minister would address the nation around 8 pm, speculation was rife about whether India was planning a second surgical strike or something similar had already been undertaken, or the prime minister would be making a bigger announcement concerning Pakistan.

 
When the nation heard the prime minister for about thirty-seven minutes, it was stunned. Yes, a surgical strike had been undertaken, but not against any terrorist camps in Pakistan, but against high-denomination currency notes in circulation in the country.
 
The decision to demonetise 86 per cent of the country’s currency in circulation has been widely understood to be a sudden decision by [PM Narendra] Modi and took everyone by surprise.
 
The jury may be still out on whether it was a decision made suddenly or the seeds of the move had been sown many months before that fateful evening of 8 November 2016. But a few developments about eight months before demonetisation do suggest that the government may have planned the move much earlier.

 
On 29 February 2016, Finance Minister Arun Jaitley had risen in the Lok Sabha to present the Modi government’s third Budget. Little could anyone tracking the finance minister’s speech sense that the government was readying for a much more dramatic and disruptive change about eight months later. Yet, there were perhaps some hints. They became a little too obvious, of course in hindsight.
 
Jaitley announced a big push to the Pradhan Mantri Mudra Yojana (PMMY) for the benefit of entrepreneurs at the bottom of the pyramid. The amount sanctioned under PMMY had already reached about Rs 1 trillion by the end of January 2016 and the number of beneficiaries crossed 25 million. The target for 2016–17 was raised to Rs 1.8 trillion. The push was aimed at providing financial support and incentives to small and medium enterprises, a sector that would be hit hard by demonetisation.

 
In another Budget announcement, Jaitley proposed to expand the reach of automated teller machines (ATMs), particularly in rural areas. A nation-wide rollout of ATMs was planned to provide better access to financial services. Post-demonetisation, the use of ATMs would have become more critical for the limited cash individuals would be allowed to draw.
 
The finance minister (also) announced a compliance window for a limited period for domestic taxpayers to come clean and declare their undisclosed income or income represented in the form of any assets.
 
The compliance window would allow such taxpayers to clean up their past tax violations by paying tax on such undisclosed income at the rate of 30 per cent and a surcharge at 7.5 per cent and a penalty at 7.5 per cent. Thus, a penal income tax rate of 45 per cent was proposed for domestic taxpayers to wash their past sins of tax evasion.

 
Two features of the scheme are worth noting. One, Jaitley concluded his announcement by reiterating the government’s objective behind it. ‘Our government is fully committed to remove black money from the economy. Having given one opportunity for evaded income to be declared once, we would then like to focus all our resources for bringing people with black money to books.’
 
Two, the scheme was to start from 1 June and end by 30 September, with the option to pay the due tax amount within two months of the declaration. Did the warning that the government would crack down on black money with greater force have a hidden signal of what was to come on 8 November 2016?

 
There is enough in Jaitley’s Budget speech that debunks the speculation that Modi’s demonetisation was a sudden unplanned move.
 
It may be sheer coincidence, but even while Jaitley was announcing the drive against black money and a tax compliance window, his ministry was busy issuing an Office Memorandum on the promotion of payments through cards and digital means across the country.
 
On 29 February 2016, it was sent to all secretaries of the central ministries, the RBI governor, the chairman of Telecom Regulatory Authority of India, the CEO of NITI Aayog and of course to the cabinet secretary. The grand plan was aimed at improving the ease of conducting card or digital transactions for an individual, reducing the risks and costs of handling cash, reducing the costs of managing cash in the economy, building a transactions history to enable improved credit access and financial inclusion, reducing tax avoidance and reducing the impact of counterfeit money.

 
The scope of the scheme was equally significant. It had outlined plans to provide access to financial payment services to every citizen along with the ability to conduct card or digital transactions, digitise government collections by equipping each collection point with a method to accept card or digital payments and migrate payment transactions currently dominated by cash to non-cash modes.
 
The message was clear. There was an attempt to reduce the preponderance of cash in all transactions in the economy.
 
There was also an attempt at greater formalisation of the economy, bringing more people under banking coverage. It is clear that the government was building the infrastructure where transactions could be made in non-cash modes once the crackdown on cash was announced.

 
Excerpted with permission from The Rise of Goliath: Twelve Disruptions That Changed India