The real debate

Demonetisation matter had limited relevance

The procedural debate over the government’s decision to demonetise high-value currency notes in November 2016 has ended. A Constitutional Bench of the Supreme Court, comprising judges S Abdul Nazeer, B R Gavai, V Ramasubramanian, A S Bopanna, and B V Nagarathna in a 4:1 split verdict on Monday, upheld the process and noted that the exercise was valid and satisfied the test of proportionality. While reading the majority verdict, Justice Gavai noted there were discussions between the Central government and the Reserve Bank of India (RBI) for six months, and there was a reasonable nexus to implement such a measure. Notably, he further said the process of decision-making could not be faulted just because the proposal emanated from the Central government.

The basic argument before the apex court was that the proposal of demonetisation did not emanate from the central board of the RBI as mandated by Section 26 (2) of the RBI Act. The argument, to be fair, had very limited relevance, given the fact that there was enough discussion between the RBI and the government on the matter. In fact, it is worth asking whether it was even relevant to drag the matter up to this point, considering that the decision cannot be reversed. Justice Nagarathna, differing from the majority, noted it was not under Section 26 (2) if the proposal originated from the Central government. It could have been done through legislation or, if secrecy was needed, through an Ordinance. It is worth reiterating here that the matter was related only to the process, not to the objectives.

Policy debate on demonetisation, therefore, should continue. There were various objectives highlighted by the government for withdrawing about 85 per cent of the currency in circulation by value in one go. The biggest aim was to unearth black money. Other objectives included eliminating fake currency, stopping the financing of terrorism, and formalising the economy to expand the tax base. It was also expected that the decision would boost the digital economy. In terms of outcomes, while a large number of bank accounts were detected with an unusual amount of cash deposits, about 99 per cent of the demonetised notes came back to the RBI. In terms of tax collection, the decision did not seem to have had a material impact. The gross tax receipts of the Central government, for instance, in the current year are estimated to be at 10.7 per cent of gross domestic product (GDP), compared to 10.6 per cent

in 2015-16.

While digitisation in the Indian economy was picking up, demonetisation did provide a push. It further seems to have increased because of the pandemic. However, cash in circulation as a percentage of GDP has also gone up since demonetisation. Further, the better-than-expected performance of the corporate sector in recent years suggests that economic activity has moved to the formal sector. However, this may have happened because of dislocation in the informal sector, particularly after the pandemic. Critics also argue that both demonetisation and the implementation of goods and services tax affected the informal sector. The increasing level of digitisation and formalisation in the economy would help increase productivity and tax collection over time. The progress, however, would depend on technological changes and adoption rather than a one-time move to withdraw currency in circulation.