Despite the Spin, Demonetisation Simply Wasn’t Worth the Time or Effort

The RBI’s data, and the government’s new narrative, is indicative of how badly demonetisation failed. Worse still, more important goals such as cracking down on benami property and reforming political funding are being gone about in a half-baked manner.

Much of the behavioural change the government wanted from demonetisation comes from GST. It’s the other goals such as clamping down on benami property that have fallen by the wayside. Credit: Reuters

Politically, Prime Minister Narendra Modi sold the idea that demonetisation was a pro-poor move, aimed at flushing out black money lying with the relatively wealthy. The RBI has now finally released data to show that 99% of the notes that were demonetised last November are back with banks. This means that whoever had black money has successfully pushed their money back in the system. This is clearly a colossal failure of the policy, whatever new spin finance minister Arun Jaitley might want to give. The obvious fallout of this monetary vandalism inflicted on the nation last November is a decline in industrial growth, bank lending and employment generation post-demonetisation.

Remember, we were told that banks would have massive new deposits, which would be lent to businesses. Well, bank credit growth for the nine months since demonetisation is the lowest in 60 years.  

Even the finance minister shouldn’t be able to spin happy stories in the face of such negative data. That hasn’t stopped him from trying though. On Wednesday evening, Jaitley made an astounding claim that there was nothing wrong in 99% of the demonetised money coming back as it was never the aim of the government to confiscate black money. “We wanted behavioural change in the economy,” Jaitley has said.

Let us examine both these claims. First, it was the finance minister himself who had claimed in November that going by past experience about 15-20% of the demonetised currency, roughly Rs 3 lakh crore, was likely to get extinguished and would not return to the system. Thus it would be tantamount to confiscation and become RBI property, to be eventually handed over to government for the welfare of the poor. The then attorney general Mukul Rohatgi stated this before the Supreme Court. So how can Jaitley now say the confiscation of black money was never the objective? The cash that does not return to the system stands automatically confiscated. It is like money taxed at 100%.

Nevertheless, the finance minister has to give a new spin because everything did indeed come back and nothing got extinguished or confiscated. It is doubly embarrassing for the government that the RBI ended up spending over Rs 30,000 crore on the printing of new currency and managing the other logistics of demonetisation. As things stand, the expenses incurred by the RBI are way more than the actual amount of Rs 1000 and Rs 500 notes that were extinguished or confiscated – Rs.16,000 crore. It is this deficit that caused the RBI to hand out far lower dividend to the Centre for 2016-17.

Indeed, Modi’s tone from day one after demonetisation was one that threatened to confiscate black money. There were widespread raids all over the country. In the initial weeks, there was great enthusiasm shown by the government and the RBI as it reported on a daily basis the cash that was coming into the system. Then at some point  in December, the RBI stopped giving daily reports because the government realised the bulk of the demonetised notes were coming back, thus making the prime minister look bad. By December-end, nearly Rs 13 lakh crore had come back. The RBI was possibly told to clamp down on giving any further information in the name of national security. In the meantime, the Centre began changing its narrative to achieving greater digitisation, curbing fake money and terror funding.

This overall failure is more palpable when one realises that the whole black money debate only relates to the cash component of the total black wealth stock, which is about 40% of GDP. Thus, the total black wealth stock is roughly $800 billion and the cash component is merely 6% or $50 billion. The remaining $750 billion of black wealth stock is in real estate, gold and the like, which has not been touched yet. We have a long way to go.

Jaitley said the government would target benami properties under the amended law but so far one has only seen the IT department going after the alleged benami wealth of opposition parties. Recently in the Lok Sabha, Orissa MP Jay Panda, urged the government to identify benami beneficiaries of shell companies that may own huge properties. Jaitley replied to Panda saying “cooks and drivers” posing as directors of companies would be covered by the new benami law. Does anyone remember cooks/drivers as directors in the Purthi group of companies owned by a senior cabinet minister in the NDA. So whatever spin Jaitley might give to demonetisation, people will not be convinced unless there is action on the ground.

On Wednesday, the finance minister claimed higher digitisation and behavioural change was the big objective and not confiscation of black money. Well, RBI data shows that digital transactions fell 27% in April this year compared to the previous month. Major online retailers like Flipkart and others are experiencing cash transactions similar to pre-demonetisation levels when 60% of all buying was cash based. A friend of mine, while recently putting up his house for sale in Delhi, pointed out that the buyers that came forward wanted to pay 50% payment in cash. So much for behaviour change.

Jaitley has also claimed that demonetisation should be seen along with GST implementation as a method of examining behavioural change.

It is true that GST, if implemented smoothly, will shake up the way small firms do business. But then, if that was the goal, GST alone would have been a sufficient agent of change. In any case, the GST regime was already in the pipeline and there was no inkling that demonetisation would come so close to GST implementation. If anything, demonetisation and GST implementation being so close to each other is being seen as hugely disruptive and clearly not good for small businesses.

Finally, Jaitley has argued that political funding reform, which the government is planning, should be seen as part of the demonetisation package. This is utterly laughable because the latest data collated by the Association for Democratic Reforms shows how 80% of all corporate money has gone to BJP in recent years. Corporates who have successfully pushed their black money into the system will now contribute 80% of it to the BJP. And as per the new law brought by the government, this need not even be made public. And all this is carried out in the name of transparency!

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  • Ashok Akbar Gonsalves

    The government MUST employ professional spin doctors to cook up better stories, because the PM, FM and sundry other notables are making fools of themselves every time they open their mouths to defend demonetization.

    Kudos to Prof Arun Kumar, who predicted way back in November (in an interview to The Wire) that he expected almost all the cash to come back into the banking system!

    Steve Forbes: “India’s government perpetrated an unprecedented act that is not only damaging its economy and threatening destitution to countless millions of its already poor citizens but also BREATHTAKING IN ITS IMMORALITY.”

    Indeed. “Sickening” and “Immoral” are just right. Add “Stupid”.

    • Anjan Basu

      Sickening and immoral, surely, but calling it stupid is perhaps being too kind to this criminal project. It was not born out of stupidity — of which, of course, there is no dearth in the BJP’s ranks — but arrogance and utter cynicism that proclaim to the world that everything ‘goes’.

      • Ashok Akbar Gonsalves

        Yes, mea culpa. It was Modi’s arrogance and OUR stupidity.

    • Amitabha Basu

      I do not believe that it was stupid. The real aims were : decimate the black money hoards of the opposition political parties while ensuring that the BJP got all their black money in new currency; benefit the digital payments companies like PAYTM and credit card companies; paralyse small and medium businesses to increase their dominance by the mega business houses; and so on. A diabolical and nefarious plan which is totally anti-people.

  • S.N.Iyer

    One cannot understand Jaitley’s complacent and most unconvincing reasons on why demonetisation was a “success” Both he and Modi obviously suffer from memory loss when they forget why the reasons given for the operation. The poor implementation causing great distress to the honest and poor and causing the death of over 100 standing in queues for days to get their legal and honest money. Jaitley in a very smug remark talked of accountability when Prabhu offered to resign for about 30 passengers. Who the is accountable for these deaths- Modi or Jaitley?
    Re GST it is too early to judge the problems it has created viz price rise,closure of some small bussinesses and what more.
    There is only one conclusion, the BJP are poor in economics and the Finance Minister’s defence is more like a lawyer than an economist

    • Anjan Basu

      Well, if this is amnesia then it has to be wilful amnesia.

  • kujur bachchan

    As I see it:

    Indira Gandhi:
    – Nationalisation of banks. Game changer.
    – Setting up Maruti Udyog Limited to manufacture small cars. Game changer.

    Rajiv Gandhi:
    – Ushering in the era of computer. Game changer.
    – Ushering a revolution in telecommunication/telephony. Game changer.

    PV Narsimha Rao:
    – Liberalisation of Indian Economy. Game changer.

    Atal Behari Vajpayee:
    – Golden Quadrangle National Highways network. Game changer.

    Manmohan Singh:
    – The Right to Information Act.
    – MNREGA. Game changer.
    – Indo-US Nuclear Deal.
    – The Right of Children to Free and Compulsory Education Act
    – The Right to Food Act.
    All game changers.

    Narendra Modi:
    – Demonetisation. Fiasco. Impact – Negative. Damaged the economy.

    Koi Shaq?

    • Anjan Basu

      None whatever.

  • Sumanta Banerjee

    How long are we are going to suffer a tall-talking pygmy boasting of a 56″ chest, and a bumptious cad bragging about the benefits of demonetization and GST ?