Was demonetisation worth it? The jury is still out
As we approach its first anniversary, has demonetisation achieved its original objectives? On November 8, these were tackling corruption, counterfeit currency and terror-funding. Thereafter the Prime Minister added reducing dependence on cash.
Now that we know almost 99% of demonetised money has come back, the government’s estimates of how much black money would be extinguished have gone horribly wrong. First, the Attorney General told the Supreme Court he expected 4-5 lakh crore to be “neutralised”. Then, a Finance Ministry official told reporters Rs 3 lakh crore would not return. In the end just Rs 16,000 crore didn’t come back. Even that will shrink once deposits in cooperative banks and, perhaps, currency held in Bhutan and Nepal is counted.
This means previously unbanked money has been credited to bank accounts. As it yields returns it will be taxed and that’s a gain. If large proportions are proven to be black revenues will increase substantially.
The critical question is how much can the authorities establish is black? In his budget speech, Mr Jaitley revealed Rs 4.9 lakh crore had been deposited in 148,000 bank accounts of a minimum value of Rs 80 lakhs each amounting to an average deposit of Rs 3.31 crore. At the time, Business Standard Chairman, TN Ninan, wrote: “It’s all but certain … this is black money unearthed by notebandi.” More recently, the Prime Minister has said 18 lakh accounts are under “scrutiny” and 2.10 lakh companies have been “closed”. This is a humongous number for the CBDT to scrutinise given it only investigates 3 lakh accounts annually.
On the assumption most black money is detected, the economist Surjit Bhalla has calculated the additional revenue in the first year as Rs 2.5 lakh crore with a further Rs 1.5 lakh annually in perpetuity. If that happens it’s a huge gain but ‘if’ is the operative word. Remember, the government’s claims will be contested in court and the cases could drag on for years. For now, all we can say is some black money will be identified and taxed but what proportion that is of the total and what the gain will be is unknown.
Meanwhile, the objective of reducing counterfeit currency seems unachieved. In 2015 the National Investigation Agency established that at any point of time only Rs 400 crore of counterfeit currency is in circulation. That’s 0.028% of total currency. Now, CNBC has calculated only 0.0007% of the returned thousand rupee notes are fake and only 0.002% of the five hundred notes. In value terms that’s just Rs 41 crore. So either a lot of fake currency hasn’t been detected or didn’t exist.
In terms of tackling terror-funding the Finance Ministry said in August: “As a result of demonetisation of specified bank notes terrorist and Naxalite financing stopped almost entirely.” If true, this is a huge success but no proof has been provided. Till it is, this is just an assertion.Terror, meanwhile, has not been eliminated as the attacks on Srinagar airport, the Amarnath Yatra, Kulgam and Pulwama show.
Finally, have we reduced dependence on cash? Both in number and value, digital transactions increased sharply after November but dipped sizably thereafter. There were 671.49 million transactions in November, rising to 957.50 million in December before shrinking to 862.38 million in July. In value terms, it was Rs 94 lakh crore in November rising to Rs 149 lakh crore in March before declining to Rs 107 lakh crore in July. Clearly the use of cash did initially diminish but, thereafter, it’s steadily increasing.
So you can’t say demonetisation has fulfilled its objectives. But there’s also the well-established economic cost in terms of growth, jobs and human suffering. Growth has collapsed to 5.7% and, perhaps, over a million jobs lost. This raises the deeper question: was demonetisation worth it? The Uttar Pradesh assembly elections suggested the initial answer was yes. But is that changing? We have 18 months before the next elections to find out.
The views expressed are personal