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.

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!