The public contestation over demonetisation was only to be expected. Those who had criticised it from day one, could not be expected to change their view. Former prime minister in a surprise choice of words had called it ‘organised loot and plunder.’ As Finance Minister Arun Jaitley countered, if anything came near organised loot and plunder in the history of free India it was the scandalous goings-in during the UPA decade. Banks were looted, natural resources parceled away for a song for underhand commissions, and generally Singh ran a ‘cash and carry’ government. His unhappy and uncharacteristically abusive description of a well-meaning measure meant to cleanse the system of years of accumulated black money only showed the former prime minister in poor light, even if he was doing his master’s bidding, as he had done all his working life.
Yet, it is possible to leave divisive politics aside and assess the demonetisation a year after Prime Minister Modi stunned the nation, denotifying all notes of Rs 500 and Rs 1,000. However, the exercise seemed haphazardly implemented, causing avoidable hardships to those who actually had no black money of their own. Whereas the actual hoarders of black money invented ways to launder cash. That would explain the huge spurt in new bank accounts. It is a complex and difficult exercise to vet all the Aadhaar-linked accounts to trace the actual owners of substantial deposits.
A random screening has been undertaken. Also under scrutiny are 70,000-odd accounts where Rs 50 lakh each deposited was at variance with the history of these accounts. Clearly, greed had trumped the fear of detection, with the depositors believing they could `manage’ an inquiry, if any. Hopefully, stricter controls on the tax administration would also mean no laxity to the tax-evaders but also, more importantly, no harassment of genuine taxpayers. Another plus is the accretion of additional nine million to the tax net. Additionally, the axe has fallen on over two lakh shell companies, with their directors blacklisted. Admittedly, not all these shell companies might have been engaged in money-laundering, those need to be protected.
Another gain was the increase in the digital transactions, though their number fell from the high in December last year when there was a real cash crunch in the economy. A big plus was the sharp cut in the cash-to-GDP ratio. From a high of nearly 12 percent to a little over nine percent post-demonetisation means that much less cash sloshing around in the economy. This would make for a lower growth of black money, though already there are signs that cash may be regaining some of its earlier primacy. Given the huge informal sector accounting for a much larger employment than the organised sector, it is well-nigh impossible to completely eliminate cash from the system.
Yet, there were was a clear downside to the notebandi. One, it resulted in a sharp fall in the GDP, taking it down from 6.1 percent in the previous year to 5.7 percent in 2016-17. Informal sector suffered more than the formal sector. Some of the jobs lost due to the disruption are yet to be regained. Besides, ordinary people bore the brunt of demonetisation, though they were the most enthusiastic supporters. Modi succeeded in selling it as an attack on corruption and black money, as borne out fully by the huge victory of the BJP in the post-notebandi UP Assembly election.
A more valid criticism of notebandi is that it did not reckon with the Indians’ inherent expertise in failing anything that seeks to separate them from their illicit cash. This ingrained habit cannot be healed by empowering the army of tax men who themselves are prey to all kinds of allurements. The remedy might lie in increasing the spread of digital technology for financial transactions and tax payments and scrutiny. Happily, the Government is already working in this direction. On balance, demonetisation was as much a political as it was a financial exercise. Politically it has proved rewarding. To make it further rewarding for the economy, more steps are needed so that cash does not become king again.