New Delhi: Prime Minister Narendra Modi tried to justify his government’s decision to carry out demonetisation by arguing it would take India towards a cashless economy (later diluted to ‘less-cash’) and thereby help unearth black money, check circulation of fake currency and curb terror financing. But one year on, the move has struggled to achieve any of these objectives.
Moreover, it has spooked investors, hit the economy hard and caused massive job losses, especially in the informal sector.
The government cited initial growth in digital transactions to put a spin on the ill-judged decision, saying it has started weaning people off cash.
But digital transactions have now started ebbing away after spiking in the immediate aftermath of demonetisation.
The number of digital transactions fell to 865.8 million in September from 883.4 million in August, though value rose by 13.5% to Rs 124.69 lakh crore, according to the Reserve Bank of India (RBI), raising doubt over the prospect of achieving the target of 25 billion digital transactions by the end of this fiscal.
Debit and credit card usage at point-of-sale (PoS) machines declined both in terms of value and volume during September. The volume of transactions fell by around 5.6% in September to 229.2 million from 243 million in August.
The value of transactions too fell by 1.1% to Rs 45,193 crore in September from Rs 45,708 crore in the previous month. In comparison, the number of debit and card transactions had jumped by 51% in December 2016, the immediate month after demonetisation. Value of transactions too had risen by 48% in December.
In fact, debit and credit transactions started falling after spiking in December. Debit and credit card transactions stood at 311 million in December but fell to 265.5 million in January, registering a decline of nearly 17%.
These transactions further fell to 212.3 million in February before rising to 229.7 million in March. Number of transactions in September, at 229.2 million, was lower than March. The value of debit and credit card transactions too fell by 7.8% to Rs 48,120 crore in January from December. It further fell to Rs 39,150 crore in February before rising to Rs 41,620 crore in March. The value of debit and credit card transactions has grown by just 8.5% in six months during March-September.
India has 880.03 million debit cards and 30.86 million credit cards as of May this year. Transactions through prepaid payment instruments (PPIs) like mobile wallets too have shown a declining trend in recent years. For example, the number of PPI (mobile wallets and PPI cards) transactions declined by 3% to 261.1 million in August from 270.2 million in July, though value increased by 4% to Rs 10,288 crore.
Unearthing black money was a key objective of the demonetisation.
“The magnitude of cash in circulation is directly linked to the level of corruption. Inflation becomes worse through the deployment of cash earned in corrupt ways. The poor have to bear the brunt of this. It has a direct effect on the purchasing power of the poor and the middle class…High circulation of cash also strengthens the hawala trade which is directly connected to black money and illegal trade in weapons…To break the grip of corruption and black money, we have decided that the five hundred rupee and thousand rupee currency notes presently in use will no longer be legal tender from midnight tonight, that is 8th November 2016,” the prime minister had said while announcing demonetisation.
However, the quantum of banned notes deposited with banks shows that demonetisation failed to achieve this objective.
When the prime minister announced demonetisation on November 8 last year, the value of Rs 1000 and Rs 500 notes is estimated at Rs 15.44 lakh crore. However, according to RBI, banned notes worth Rs 15.28 lakh crore have returned to the banking system as at the end of June. While defending demonetisation in the Supreme Court in November, then Attorney General Mukul Rohatgi had said around Rs 4-5 lakh crore would probably not return to the banking channels.
The quantum of banned notes deposited with banks shows that the government’s assessment on recovery of black money through demonetisation was totally off the mark. Market sources say that up to 40% of sales and transactions in the real estate estate sector are still carried out in cash.
Rather than achieve the intended targets, the demonetisation led to massive lay-offs. As per a survey conducted by the Centre for Monitoring Indian Economy, as many 1.5 million jobs were lost in four months between January and April.
The estimated total employment during January-April 2017 was 405 million, compared to 406.5 million during September-December 2017, according to the CMIE survey.
These estimates are based on consecutive Waves of CMIE’s Consumer Pyramids Household Surveys (CPHS). These are all-India household surveys over a sample size of 161,167 households that included 519,285 adults, CMIE said.
The note ban also spoilt the investment climate and hit the economy hard. According to another CMIE survey, new investment proposals by India Inc fell to low of Rs 1,25,000 crore in the December 2016 quarter, from the average Rs 2,36,000 crore in the preceding nine quarters of the Modi government.
From October 1 to November 8, 2016, 227 new investment proposals worth Rs 81,800 crore were announced. In comparison, only 177 investment proposals worth Rs 43,700 crore were made between November 9 and December 31, 2016. In fact, the total number of new project proposals of 404 for the quarter is the lowest in over a decade, CMIE said.
While there has been no let up in terror and naxal activities post-demonetisation, nearly 100 innocent people including bank staff and customers had to pay with their lives for the blunder committed by the prime minister.