The perennial question about demonetisation is whether it helped to solve the conundrum of black economy, ostensibly, the first goal-post of the unprecedented move proclaimed by the government. The rhetoric of the government boasted to break new frontiers in economic transformation but nevertheless economic indicators released recently starkly expose such extravagant demagogue.
Recent slowdown in economy indicates the demonetisation policy was poorly planned and badly executed by the government. Anticipatively the government articulates that much of the censure is tendentious judgement made on the basis of selective and inaccurate reports.
Nonetheless fresh estimates released by the Central Statistics Office for the first quarter of financial year 2017-18 indicate the instrumentality for curbing black economy was not blemish free.
The numbers released by Central Statistics Office show that GDP grew by 5.7 percent in the first quarter of 2017-18 relative to 7.9 percent in the same quarter a year ago.
Likewise, gross value added (GAV) at basic prices rose to 5.6 percent during the Q1 of 2017-18.
In the corresponding quarter (Q1) of the previous year the GVA grew at 7.6 percent. These growth rates might be an envious pace for many countries in the world but India’s weakest since the NDA came to power in May 2014.
Pertinently, in recent times the zenith of India’s growth trajectory touched 9.1 percent in the quarter from January 2016 to March 2016. Sadly there was consistent slump in the subsequent quarters. The growth recorded in the following quarters was 7.9 percent, 7.5 percent, 7 percent and 6.1 percent.
So the Q1 of the 2017-18 is the fifth straight quarter that there is no uptick in the GDP growth. Why was there no rebound from the tepid 6.1 percent? Certainly demonetisation must have had a jolt on the growth.
While acknowledging the lapses in the policy design, Chief Economic Advisor to the government, Arvind Subermanian stated that“Demonetization was an aggregate demand shock, an aggregate supply shock, an uncertainty shock, and a liquidity shock.”
All in all the notebandi showed an appalling lack of elementary planning on the part of the government since over 90 percent of all financial transactions in India are made in cash, and over 86 percent of wage earners are paid their incomes in cash. The question is whether the hypothesis underlying the note ban was set on flimsy grounds?
Many economists now believe that the demonetisation process was premised on incorrect connotation of black economy. It was thought if the illicit cash was squeezed out the parallel economy would be eliminated. It did not target dirty cash parked in real estate and cash stashed abroad in tax havens. The central bank has now confirmed that 15.28 lakh crore which is 98.8 percent of the demonetised notes have come back to it.
Compellingly the government tries its best to play down the embarrassment by changing the goal-posts. Earlier it claimed that the move was good because the black money has now been deposited in the banks and has brought some 5.4 lakh assesses into the tax bracket.
Subsequently, it championed the cause of cashless-society as the goal of the notebandi. It added cash-less society would significantly bring down the cash-to-GDP ratio which was estimated at 12.2 percent before the November 8th announcement by PM Modi. However changing goalpost could not undo the damage it caused to the India’s growth story and the common man.
For a moment, let’s disregard the effects of demonetisation reflected by various economic indices. The real issue that confronts all of us is how the aam aadmi was made scapegoat by the note-ban drive.
Inarguably the ban adversely affected the poor, small businesses, farmers, labourers and other minorities holding petty cash. The cash crunch affected this informal economy sizably and it will take them many quarters to convalesce from the jolt.
Understandably government found votaries for its reckless move in Paytm owner Vijay Shekar Sharma, Ambanis, Mahindras, Kiran Mujumder Shaw et al. Such pro-establishment die-hards continued to snigger and argue that the drive has thwarted nefarious attempts of hoarders to dump black currency.
However little do they realise that common man bore the major brunt of this hasty pursuit. Poor and middle class were made to suffer in serpentine queues outside ATMs and bank branches to exchange their hard earned money. 140 lost their lives owing to stress and anxiety perpetuated by the demonetisation.
A country which has paltry 20 ATMs per 100,000 people, as compared to 77 in China, 114 in Brazil, and 279 in South Korea should have done some serious homework before unveiling the preposterous policy.
The shock of demonetisation could have been averted had the government taken cognizance of various precedents in this policy decision around the world. For example the EU replaced a large number of currencies in 2002. Its citizens were given a two months time period for transition.
In December 2014, the Philippines announced that the old peso notes would be withdrawn starting January 1, 2015 with citizens given until the end of 2016 to exchange the old notes. In Africa Zimbabwe gave its citizens a three month window before replacing the demonetised dollar.
In all the three instances the old currency continued to be legal tender during the transition process which saw relative calmness and tranquillity among the masses.
Furthermore, the government of India also overlooked bizarre outcomes of India’s first demonetisation experiment in 1978 against parallel economy. The then government led by Morarji Desai introduced the High Denomination Bank Notes (Demonetisation) Act and made bills of Rs 1000, 5000 and 10,000 illegal. The expectation at the time was that the shadow economy, estimated to be around 15-18 percent of GDP then, would reduce drastically if not get totally eliminated. But shockingly black money went up to 18-21 percent during the subsequent years.
So why the policy targeting alleged black cash could not prevent its hoarders from depositing the notes during the current demonetisation drive? Of course lack of preparedness coupled with human ingenuity made 98.8 percent of the demonetised bills back to the central bank.
Human ingenuity played incredibly antagonist role in thwarting the government to stop real culprits from depositing the old bills. Poor judgement in terms of designing of the policy brought all the allegedly illegal bills back to the system, thanks to money-mules.
Money-mules served as intermediaries for hoarders with large chunks of banned bills. The cash was divided into small batches among the mules and deposited mostly into flagship Pradhan Mantri Jan-Dhan Yojana accounts.
Notably these accounts touched a new high of Rs 64,564 crore and allegedly acted as safe vehicles for converting black cash into white. The use of money mules made it difficult to figure out or identity the real fraudsters.
At this point of time government claimed to have employed big-data analysts to zero in on the suspicious movement of cash however with little success.
Even if we are yet to see any major breakthrough by the Income Tax sleuths yet one of the costs which people haven’t paid enough attention to is interest earned on alleged black cash. The money which was sitting purportedly in mattresses, safes, basements or false ceilings wasn’t earning any interest at all. Now that it is in the formal system there are people gaining interest on it.
As per one estimate, if the expectation was that Rs 3-4 lakh crore were held in dodgy cash, the banks have paid Rs 10,000-12,000 crore at a savings bank interest rate of about 4 percent!
Speaking on this issue, former RBI Governor, Raghu Ram Rajan remarked that, “This is not an insignificant cost over and above note printing and note cleaning up. So when people thump on the table and say we have formalised this, I think they misunderstand what cash actually is.”
Ostensibly the government intended to give an upgrade to the economy ended up paying heavy social and economic costs.
Clever found their way around demonetisation but those who never had any black money were demonised. The sum and substance of the demonetisation is a black cat allegory.
The government seemed looking for black cat in a dark room that wasn’t there and still shouted “we found it!”