No gains; it was all pain Demonetisation success in question as RBI annual report says that 99 per cent of invalidated cash has come back 




    By HarvinderAhuja

    It’s official now! The demonetisation was a flop show and it failed to achieve any of the objectives stated by Prime Minister Narendra Modi while announcing the historic decisionon November 8 last year. Even the changed goalposts, which the Government kept on announcing during the course of the exercise, have been achieved in a limited, rather illusory manner.

    The Reserve Bank of India has said that as much as Rs15.28 lakh crore of the high-value currency that was demonetized had returned to the central bank.“Subject to future corrections, based on the verification process when completed, the estimated value of SBNs [specified bank notes] received as on June 30, 2017, is Rs15.28 trillion,” the RBI said in its annual report released on Wednesday.

    With as much as 99 per cent of the demonetized Rs 500 and Rs 1,000 notes having been deposited or exchanged, one can legitimately ask the question whether the massive disruption that the whole exercise caused was really worth it. The RBI data proves that the pain which the entire nation went through was totally disproportionate tothe gains that accrued to the economy.

    Scrapping of the higher denomination notes had caused acute hardship to people and businesses at large. Massive queues outside banks and ATMs had become a perennial sight when the deposit/exchange window was open during the exercise. Frayed tempers were witnessed all around and there were fights, violence and even loss of lives.

    Economic activity faced a slowdown, and came to a standstill in some sectors, because of the liquidity crunch caused by elimination of large amount of cash from the system. There were a huge number of job losses and many had to undergo pay-cuts. The biggest sufferer was the informal sector which saw shutting down of many units. Overall, the economy suffered a 2 per cent hit, as was already predicted by many economists, including former Prime Minister Manmohan Singh.

    The prime objective of the demonetisation, as the PM had stated in his November 2016 address, was unearthing black money. Since mere 1 per cent of the currency has not come back to the RBI, it shows how that vote-catching gimmick has come a cropper. Moreover, it also proves that a major chunk of the black money is not hoarded in cash. There are many other avenues available, benami transaction and property investment being two obvious ones.

    The RBI annual report says that at least Rs 16,000 crore did not return to the system out of the total value of Rs 500 and Rs 1000 notes in circulation worth Rs 15.44 lakh crore. This also is no gainer as the apex bank spent Rs 7,965 crore, nearly half of the Rs 16,000 crore, for printing new notes between July 2016 and June 2017.

    The other ‘noble’ objective of the exercise was to end the dangers posed by counterfeit currency, the growth of which was proving a major headache for RBI. In fact, the central bank had told a parliamentary committee in July this year that ending the counterfeit currency menace was one of the reasons for accepting the Government’s demonetisaton move.

    Though the RBI’s Wednesday report stated that counterfeit notes detected were 20.4 per cent higher than the previous year, the total value of fake demonetized Rs 500 and Rs 1000 notes in 2016-17 was just Rs 41 crore. That much for the Government’s ‘major war’ against fake currency!

    The Government had also claimed that by eliminating fake currency it would curb terror funding and cripple drug trafficking industry as both are heavily dependent on counterfeit notes. How far it can achieve these worthy goals with this miniscule amount is anybody’s guess.

    During the months when the demonetisation process was on and when the Government realised that it had bitten more than it could chew, it started shifting goalposts. A key objective of the exercise suddenly became cashless economy. Given the liquidity crunch during those days, people did resort to digital transactions in large numbers. A massive campaign was unleashed by the Government to promote cashless or ‘less-cash’ economy and, for some time, PayTm and other digital wallets had a field day. Once the situation eased and cash flooded back into the system, it was back to normal. Leaving aside metros and big cities, digital transactions seems like history now.

    Another claim made recently by the Government was that that tax base in the country had widened post-demonetisation. It proudly announced that 25 per cent more had come under taxation ambit after this exercise. There is no fudging of figures here, but it conveys only the half-truth. The rise in tax base is a routing phenomenon and last fiscal’s growth figure was even above this—27 per cent!

    However, the failure on all these counts, as proved by the RBI annual report, has not deterred the Government from claiming success of its demonetisation decision. It is fighting shy of admitting that a policy decision of momentous proportions was taken without doing any detailed, economic analysis of its impact. It is sitting smug on its ‘achievement’ and won’t hesitate to sell it to masses to catch votes during future elections. Good luck to it!