One Year of Demonetization: The Pain Is NOT Worth the Gain!


The date marks the first anniversary of the great Indian demonetization which was projected as the historic decision by the Modi government. In a single stroke, 86% of the currency in circulation was taken out of the system. The objectives stated by the Prime Minister were to unearth the black money, choke terror funding, seize counterfeit currency and hit hard on corruption. But when the utopia could not be realized, the goalposts were shifted to formalization and digitalization drive. Even that could encase limited success. Amid much fanfare, More than hundred people have lost their lives directly or indirectly caused by the demonetization drive.

One year since the whole exercise begun, available statistical data is confident enough to suggest that demonetization was not only badly planned and poorly executed but also a conceptually flawed decision. Former Prime Minister and the eminent economist Dr Manmohan Singh while terming demonetization a monumental mismanagement predicted a 1-2% hit on GDP due to it.  GDP for Q2 FY 18 aligning on the lines of his prediction has plunged to a three year low at 5.7%.

The attorney general in the affidavit filed before the Supreme Court stated the government estimated Rs 10 lakh crore to come back as deposits expecting 3-4 lakh crore of black money to be flushed out of the system. The expectation of the windfall gains was wiped out with the report of RBI stating that 99% of the demonetized currency got deposited back to the system.

The government making an overnight change of stance amusingly claimed the report to be a victory and stated that the dubious transactions were going to be thoroughly investigated. The truth is that the rich and powerful black money lobby was successful to park their ill-gotten wealth back to the system either through the nexus with banking officials or via rechanneling it through shell companies or Jan Dhan accounts. It was only the “Aam Admi” who supported the move at his best, suffered the worst. The government while unleashing tax terrorism and inspector raj is still churning on the data and yet to find the real black money hoarders.

Though any push to the formalization of the economy should be a welcome step, the applied “shock and awe therapy” has resulted in the total shutdown of selective informal sectors. Amid the fervent talks of unearthing the black money, the government has completely missed the point by assuming that “all cash is black and all black is cash.”

It is to be noted that 92% of the employment comes from the informal sector which constitutes agriculture and Micro, Small and Medium Enterprises. It also contributes about 48% of GDP. The fact that the informal economy operates almost in cash only mode does not implicate it to be a black money hoarder. Streamlining the sector on the formal channels is a desirable goal but the applied method has called for a total shut down.

In a way, the Indian economic structure explains that informality has been the strength of the sector. The forceful formalization would take away that advantage & make them prey for the large corporate houses which enjoy the economies of scale.

As expected the principle of competition among the unequal has wiped out the employment boosters like the leather industry of Kanpur, power looms of Surat and garment hub of Tirupur resulting in a 1.5 million-plus job losses post demonetization. The Real Estate sector has come to a halt and so the construction jobs. The informal sector needed a gradual shift to formalization starting with tax incentives, better credit accessibility, market demand and other policy supports.

On the other hand, the government apparently made a naive assumption that the black money only exists in cash. The demonetization could just hit the stock of black money, particularly in cash. It was incapable to touch upon the black money stored in forms of real estate properties, gold etc. Further, it could also not address the flow of black money in the economy making regeneration a potential possibility.

On the similar lines a digital push to the economy was a welcome step but again the method adopted still remains questionable. After an initial surge in digital payments, largely attributed to a shortage of cash in the banking system, digital transactions have seen a dip, indicating a slow reversal in the usage of digital platforms. The digital transactions which sharply spiked to 149 lakh crore in March 2017, up from Rs 94 lakh crore in November 2016 have come down to Rs 99.28 lakh crore in October (till 29th). However, bankers and analysts said a complete switch back to pre-November 8 trends has not happened, holding out the possibility that there has been some behavioural change in transactions patterns.

Though the government has met some success on better tax compliance and digitalization of the economy, it has totally missed the stated larger goals. Even the limited success has come at the unwarranted cost to the national exchequer, shaken consumer confidence, and existential threat to MSME’s.

The argument of increased tax compliance is morally challenged by the mega recapitalization plan of public sector banks which would ultimately incentivize the willful defaulters of the corporate world at the cost borne by the Indian taxpayer. Conclusively, demonetization can be termed a huge political success for the Modi government but least have been the benefits to the Indian Economy.

The long-term impact of the mammoth exercise is yet to come out as companies are still getting de-registered, the data is still getting mined and the debate is still on. But if we were to believe the great John Maynard Keynes, ” In the Long Run We Are All Dead!”


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