Those who say demonetisation is good in the long run should recall the quote: ‘In the long run we are all dead’.
-Dr. Manmohan Singh (Former Primer Minister of India, Economist)
November 11, 2017| The monumental action by the government of India to scrap Rs.500/- and Rs.1000/- currency notes from the country on November 8, 2016, recently completed one year. The decision initially hailed as a masterstroke ended up becoming the cause of death for over a hundred and forty people and left a devastatingly long term impact on the economy of the country.
To the people unaware and in response to the questions “what is demonetization?“, and why did demonetization fail in India? Demonetisation is a situation where the Central Bank of the country (Reserve Bank in India) withdraws the old currency notes of certain denomination as an official mode of payment. The brief facts of the aforesaid situation are as follows. On the evening of November 8, 2017 at 8.00 p.m. the Prime Minister of India made a sudden announcement’ therewith scrapping Rs.500/- and Rs.1000/- currency denominations from their legal tender and circulation. These currency notes accounted for 86% of the total value of the legal currency in circulation in India. Overnight, the 86% currency notes became mere papers in the hands of the public, bereft of their legal tender. This left millions of people with no money to resort to. The Automated Teller Machines (“ATM”) were stopped from functioning across the entire country, while some were still popping out the old currency notes, the new ones were yet to be printed by the erstwhile Reserve Bank of India (“RBI”). The inability of the existing ATM’s to fit the new currency notes further led to a delay in the circulation of the new set of currency notes in the market.
So, was demonetisation a success or failure?
The demonetization advantages were meant to be implemented by keeping the following objectives in mind:
- To flush out the fake currencies which were in circulation;
- To attack terrorist activities which were using such monies to fund their agendas;
- And primarily to flood out the black money from the system.
None of the said objectives were fulfilled, and by any measure, the Prime Minister’s decision is incomprehensible. The demonestisation effects were adverse in nature.
The failure is reflected from the figures revealed by the government agencies themselves, which eliminates the possibilities of a conspiracy theory and political hand at work. As the RBI revealed, fake currency worth only Rs. 41 crores (US $ 6.8 million) was discovered. This was against the estimated amount of Rs.4-5 lakh crore (US$ 66.66 – 83.33 Billion) provided by the Attorney General in the Supreme Court of India on November 23, 2016.
The terrorist’ activities which were sought to be curbed by the move could not be restrained and increased many folds after a stoppage period of one and a half months. In March 2017, the Reserve Bank of India further revealed that currency notes worth 15.28 lakh crore (US $ 256.6 Billion) equaling 99% of the total scrapped amount was deposited back in the banks by the public. This resulted in the figures that only 1% of the total amount (presumed to be the black money) was in the hands of tax defaulters. Thus, the objective of attacking and catching hold of the tax defaulters with black money fell flat on its face.
It is estimated that black money constitutes 25% of India’s national income (under GDP). If we apply this ratio to the cash deposited in the banks, then it turns out to be Rs.3.82 lakh crores (US$ 63.6 Billion). If black money actually existed in the form of un-kept scrapped currency notes then it is clearly to be presumed that the demonetization ventured the culprits to convert it into “white” money.
En-route the process and complications which arose with the demonetization, the government of India, specifically the finance ministry turned to re-route its objective. They categorically proclaimed that the entire purpose of demonetization was to create a “cashless economy” (not cashless enabled). This too when around 80% of the country’s trading infrastructure is based on an informal process. Even the developed nations still use a considerable amount of cash in circulation, and implementation of this thought in such an impossible way was nothing short of a ridiculous act. As reported by Indian Express (and Economic Political Weekly) the currency lying with the Indian masses as on September 29, 2017, was worth Rs.14.96 lakh crore (US $ 249.3 Billion), which is 1.1% less than the currency that was existing on November 8, 2016. A full touted failure for establishing a cashless economy.
In the face of the purported failure, the government once again changed its objective to a never intending goal of “digitization” and started with the advantages of demonetization. Digitization herewith means shifting the entire economy to the online payment mechanism i.e. making transactions through electronic devices such as mobile, debit cards, pay-seller machines or using e-payment mechanism(s). Ironically, that was far-fetched from reality. Not taking the minuscule achievements of demonetisation away from the Government, the number of digital transactions increased from Rs.102 crore (US $ 17 Million) in October 2016, to Rs.156 crore (US $ 26 Million) in March 2017. Thereafter the online transaction has been on a constant decline. The question that arises thereafter is, was this growth worth the woes and resultant death of 140 people?
The Government of India as of now’ has been advertising the positive impacts of demonetization, wherewith claiming an increase in Income Tax returns. This is further ironical of the facts that (according to government statistics) in the F.Y. 2011-12, the IT returns had increased by 80%, and thereafter by 30%. And presently the majority (70%) of the income tax filed by the people are by those who have a per capita income of Rs.5 Lakh (US $ 8000/-) per annum only, which after tax exemptions is a meager sum and negligible when compared to the population of 1.2 billion people in India.
In furtherance of the actions, the economy (GDP) of the country suffered terribly. And why wouldn’t it, for the 86% of the currency notes were scrapped and withdrawn overnight, without prior intimation to the citizens of a democratic republic. The government had issued Rs.2,000/- new currency notes. These currency notes (as per March 2017) constituted 52.2% of the total value but barely 3.3% of the number in individual notes. These high denomination notes lacked transaction value and paralyzed the entire economy. A country whose 20% population or about 276 million people, live below US $1.25 per day on purchasing power parity (2012 Census).
The impact of demonetization in India wasn’t limited to above. If the drawbacks were limited to above, then this wouldn’t have been termed as an organized loot by former Prime Minister/ Finance Minister of the country. This process brought the economy to a standstill. The demonetization decelerated the economic growth (hasted the deceleration) to a meager 5.7% and is bound to impact the economy further. Despite getting supportive guidance from the unmindful implementation of the Goods, Sale and Service Tax (GST) it is further bound to slow the country’s growth down.
The usually un-organized sector comprising of the micro-mini, small scale industries which happen to form 80% of the informal economy in India, were badly hit. The total loss in demonetisation in common parlance included losses of the labour class, the traders, the small businessmen and businesses, low paid contract workers, etc. By April 2017, around 15 lakhs (1.5 million) jobs were already lost due to demonetization. As per the 2016 Employment Unemployment survey, India already has a falling job growth rate (jobless growth). This entire demeanor has withered away from the present government’s promise of creating 2 crores (20 million) jobs in India.
The purpose of bringing out the aforesaid facts was not to criticize any particular ideology, but to bring forth the woes of a nation which had to suffer at hands of and the adamancy of a limited few sitting at the helm of power.
Despite these countless negative figures and the woes of the citizens, the present government has been celebrating this monumental failure as anti-black money day. Something to ponder about, whether it’s stupendous of the government, or citizens like us to have voted them into power.
There is not even an iota of doubt that the issue of black money and corruption has eaten into the socio-political and economic arena of the country. It has grown in strength and needs to be attended, cured and resolved. Even on a historic basis, the process of demonetization had never been implemented in India before, primarily due to lack of political will power and failure of the ruling establishment. Overwhelmed by its majority, the government of India acted without proper consultation and proper thought(s) into the process.
No matter how good of an intention it was, or in stupendous words of the finance minister “an act backed by ethics and morality”, was it worth the death of 140 citizens? Was it worth all the woes gone through by the citizens of the country, who stood tirelessly in queues for hours/days to deposit and withdraw their own hard earned money? It is worth remembering that this chaos continued for 6 months, and is still a cause of suffering for millions.