Nine months after demonetisation, with almost 99 per cent of the banned notes back into the system and the economy gripped by slowdown, there are questions being raised and answers still being sought. The former Governor of the Reserve Bank of India, Raghuram Rajan, has said that if a decision such as this turns out exposed – of not having the right effects on the economy, “as a country, you would want to ask what were the inputs that went into that decision”.
In his new book, I do what I do, launched on Tuesday, Rajan says he had conveyed to the government that though there could be long-term benefits, the likely short-term economic cost would outweigh them and that there were potentially better alternatives to achieve the main goals.
He has also said that the RBI put together a note to the government outlining the potential cost and benefit of demonetisation as well as alternatives that could achieve similar aims besides flagging off what would happen if the preparation was inadequate.
He indicated that the chilling effect that such a move would have on economic activity, especially on informal activities which cannot migrate to other modes of transactions such as credit cards, was red-flagged to the government. As for the RBI’s apparent suggestion prior to demonetisation to withdraw only 1,000 rupee notes and not the 500 rupee note, Rajan said that the more a currency is used for transactions, the more the central bank has to be in readiness to replace it.
India’s demonetised currency may have found its way back into the system but analysts suggest that far from tarnishing Prime Minister Narendra Modi’s image, the strategy will ultimately be viewed as a success.
“It’s important to remember that the demonetisation move was intended more as a political move than as an economic one,” noted New York-based South Asia-focused Eurasia Group analyst Sasha Riser-Kositsky.
“The drama of demonetisation allowed Prime Minister Narendra Modi to demonstrate in a very visible way his commitment to fighting corruption and black money.”
Earlier this week, the annual report from the Reserve Bank of India (RBI), the country’s central bank, found that a total of 15.28 trillion rupees ($239 billion) worth of cancelled high-value notes were deposited or exchanged for new money in the 10 months since the strategy was implemented – which amounted to 99% of the number in circulation before the plans came in. Still, this is not the final number. The RBI is yet to count old notes received by cooperative banks and those deposited by citizens and institutions of Nepal. Once this exercise is over, the final tally won’t be far from the 100 percent mark.
The results of the whole exercise suggest a damning failure for Modi and his flagship policy.
Opponents have hit out at Modi and accused him of damaging the economy and tarnishing the country’s credibility at home and abroad. First quarter gross domestic product (GDP) data released on Thursday marked a three-year-low of 5.7 percent, versus 7.9 percent the year before. The RBI had to spend 79.65 billion rupees on quickly printing updated replacements for the 500 rupee ($7) and 1,000 rupee notes which were abruptly banned at midnight on November 8th last year, according to the central bank’s annual report.
There are reports of major job losses in informal sector. Even the right-wing labour unions have accused the Modi-government of destroying jobs with the ill-prepared demonetisation move.
As a result of demonetisation, and in tandem with Modi’s ‘Digital India’ strategy, which aims to expand India’s online infrastructure, the country now sits on a treasure trove of data. The government has been gradually making enrolment to its national electronic database ‘Aadhaar’ mandatory for tax returns, opening of bank accounts and any purchases above 50,000 rupees. It is estimated that over 99 percent of Indians aged 18 and above are now enrolled in the scheme.
This means that the government can expect to see the benefits of taxation on previously hidden black money over the coming months and years.
India’s finance ministry says it is probing 1.8 million bank accounts where cash inflows during the demonetisation period “did not appear in line with its tax profile,” meaning it can expect some belated tax payments.
“There are also long-term benefits from demonetisation in terms of increasing income tax payments going forward and encouraging the use of digital payments over cash, a means of encouraging better tax compliance among businesses,” Riser-Kositsky explained.
As for whether the exercise has been a success, there are claims and counter claims about the stated objectives of demonetisation after 10 months. There were three main objectives to it in the beginning before the government began shifting the goal posts after each stage. These were fighting black money, cash-based corruption and terror funding. And later the objectives of digital-shift and cashless economy were added when Modi spoke about this in his Mann ki Baat programme. Subsequently, much stress was given to mainstreaming of money and expanding the tax base as the major victories of demonetisation.
If one looks at the record of India’s corrupt, under-equipped tax department, the rate of success in the battle against tax cheats aren’t very encouraging. The government and taxmen will have to work hard to change this record. But, as Rajan cautioned, giving a free hand to taxmen and pushing them for targets could also lead to harassment of even legitimate depositors. The government needs to be careful not to let this happen.
With Rajan’s explosive revelations, at a time when RBI announced in its annual report that 99% demonetised money has come back, more questions arise as the nation took to social media to criticise, trash or voice their concerns.
Twitterati was quick to join the bandwagon and trended the hashtag #DeMonetisationFailed. While some criticised the government, others sneaked in jokes.
Only Rs 16,000 crore of demonetised currency was not deposited with banks, according to data in RBI’s annual report.https://t.co/El6ZYqRE18
— News18 (@CNNnews18) August 31, 2017
Rs 16000 cr out of demonetised notes of Rs 1544,000 cr did not come back to RBI. That is 1%. Shame on RBI which ‘recommended’ demonetisation
— P. Chidambaram (@PChidambaram_IN) August 30, 2017
— Randeep S Surjewala (@rssurjewala) August 30, 2017
— Sitaram Yechury (@SitaramYechury) August 31, 2017
http://www.news18.com/news/buzz/twitter-has-a-field-day-after-rbi-says-99-of-old-currency-came-back-1505425.htmlTags: Demonetisation, Insights Tool, Raghuram Rajan, RBI