Big bang failure

Demonetisation could not meet its stated objectives

The annual report of the Reserve Bank of India (RBI) for the last financial year was eagerly awaited for one key reason — gauging the impact of demonetisation. The report released on Wednesday presented an unflattering picture; almost 99 per cent of the Rs 500 and Rs 1,000 notes that were declared invalid by the government on November 8, 2016, had come back into the banking system by the end of June. This was in stark contrast to the varying estimates made by government spokespersons about the quantum of cash that was unlikely to return to banking channels.

Stung by the Opposition criticism as to whether the purpose of the exercise was to convert black money into white, the government said on Thursday that close to Rs 3 lakh crore money that has come to the banks is being scrutinised. While the action that follows remains to be seen, the evidence so far on the claims of demonetisation benefits is disappointing. The truth is the three stated objectives at the time of announcing demonetisation – getting rid of black money held in cash and counterfeit notes used in terrorist operations, and a digital push for transactions – have not been met. Since almost all the money has come back to the RBI, the primary objective of getting rid of unaccounted cash has not been served. The number of counterfeit notes, as the RBI data shows, is also too small to affect terrorist funding. Finally, cash being pumped back into the system under remonetisation continues to be faster than normal. As such, the eventual level of money supply may not show any reduction from the November 2016 level. So what price a digital economy?

The only positive that the government can claim, and has claimed, is that the number of income taxpayers has gone up sharply. There has been some debate on these numbers and about the seemingly conflicting claims. But again, while any increase in the number of people paying taxes is a plus, the additional tax collected is hardly anything to write home about. On the negative side, the RBI has had to bear a big burden because it had to absorb the surge in deposits through the reverse repo and liquidity adjustment facility (LAF) and compensate banks. This, in turn, resulted in the halving of the RBI’s dividend to the government. The printing of new currency notes has also been a cost factor. 

In addition to such clearly designated losses, there was all the disruption of normal economic activity — daily wage earners losing income (the latest Economic Survey had said that there was a 30 per cent surge in demand for MNREGA employment in north India, following demonetisation), and people having to stand in queues for days. The impact of this upheaval was well registered across sectors such as construction, leading to a slowdown in growth of the gross domestic product. The RBI report underscores the apprehension that these economy-wide travails were to no great purpose in the end, especially since cash seems to have come right back into real estate deals, not to forget that a lot of money laundering went on through the use of “cash coolies” and other methods. The government had little to show for as revenue from its second income disclosure scheme unveiled just a fortnight before the demonetisation deadline ended. All things considered, there can be only one verdict. Demonetisation was a blunder, poorly thought through and badly executed.