Almost a year after Prime Minister Modi in one fell swoop declared Rs 500 and Rs 1,000 notes illegal tender, sucking out 86 per cent or Rs 15.4 lakh crore from the system, India is still limping back to normalcy.At the Lasalgaon market in Nashik district in Maharashtra, Asia’s largest onion trading hub accounting for 15 per cent of national sales, IndiaSpend.org’s Swagata Yadavar reports an atmosphere of gloom. Onion prices have crashed.
The government insisting on cash being replaced by cheque and digital payments is working against farmers and in favour of traders, the IndiaSpend survey shows. With slow digital infrastructure, cheques take 3-4 weeks to cash, delaying the buying of seed and fresh sowing operations. Often, the cheques bounce.
On the night of November 8 last year, the government declared a war on the cash economy and black money. What happened, in fact, was a reasonably robust economy slowed down, and many small and medium enterprises (SMEs) got wiped out. The poor and the marginalised lost their jobs and had to spend days in queues at banks to draw a few rupees of their own hard-earned money.
Little black money recovered
On the first anniversary of notebandi, the PM is still in an aggressive mood threatening to crackdown on benami assets. There is still support for his ‘bold move’ to root out the parallel economy that was funding terrorism and corruption. Some even said stone-pelting in the Kashmir Valley disappeared after the Rs 500-per-day per ‘stone-pelter’ could not be sustained after the evaporation of illegal money stashes!But beyond the rhetoric, was the government able to unearth large stashes of ‘black’ or unaccounted money?
A Reserve Bank (RBI) report in end-August this year showed that of the Rs 15.44 lakh crore of demonetised notes circulating in November 2016, 99.96 percent or Rs 15.28 lakh crore was returned, leaving just Rs 16,000 crore unaccounted for. The government was expecting around Rs 3 lakh crore of ‘dirty’ money not coming back to the system; but black money operators, traders and criminals employed armies of ‘mules’ to deposit their stashes under benami names, money that became legal when withdrawn from the banks.
The learning: unaccounted income is not stored in cash and under mattresses. An analysis of IT records shows that only six per cent of unaccounted wealth is kept in cash, while the bulk is parked in real estate, or abroad in a variety of instruments.
Digital blunder
Demonetisation was also an attempt to move towards a cashless, digital economy, but that is not easy for an economy that runs on cash. There was an initial spike in digital transactions. From November to December 2016, mobile banking and other digital payments went up from 9.6 lakh to 10.4 lakh transactions; but once more cash became available, by February 2017, digital transactions fell 16.7 percent to 8.08 lakh. A ‘cashless’ economy needs a high level of digital infrastructure and financial education; and India will take some time before getting there.
Pain on the ground
On the other hand, demonetisation triggered a slowdown and job losses that has meant unending pain for the common man and an embarrassment for the government. India showed a robust 7- 7.9 per cent robust gross domestic product (GDP) growth in the three quarters till the end of calendar year 2016, making it the fastest growing economy even ahead of China. Post-demonetisation, GDP growth fell to 6.1 per cent for the January-March 2017 quarter, and then further down to 5.7 per cent for the April-June quarter, making our growth rate slip behind China.
Translated into real terms, it is estimated that businesses suffered losses of Rs 1.28 lakh crore for the first 50 days of demonetisation, and approximately 15 lakh people lost their jobs in the first four months after November 8.
With hindsight, it is clear the government did not have its ear to the ground. The Prime Minister ignored the advice of Raghuram Rajan, former RBI governor who retired in September last year. Chief Economic Advisor Arvind Subramanian remained silent and was believed to have also been against the ‘big bang’ reform. Perhaps, some convinced the PM that a ‘Robin Hood’ attack on black money was easy to muddle through; and it would give him rich political benefits.
Events have proved demonetisation was an economic disaster; but the jury is still out on whether the people perceive it so, and will punish the ruling party in the upcoming 2019 Lok Sabha elections.
[The author can be contacted at gurbir1@gmail.com]