Demonetisation will go down in Indian economic history as one of the greatest policy blunders. In the two quarters prior to the ban on high denomination rupee notes, the Indian economy had registered around 9% growth. Since then, the growth steadily decelerated and was around 3% in the quarter preceding Covid. Calculations on the back of an envelope revealed that the total national income loss, assuming sustained potential growth of 9%, would be more than Rs 13 lakh crore.
Money is to the economy what lifeblood is to our body. If the whole blood is suddenly sucked out of our body, we will be dead. Similarly, a sudden withdrawal of 86% of the value of notes in circulation would result in an economic collapse. The total mismanagement of the operation of printing, distributing and exchanging the new legal tender for the cancelled notes did not take place within the 50-day period that the prime minister had boasted about. It prolonged into months. By the time the money came back into the system, many micro, small and medium units had withered and died.
Jobless growth and poverty: The body blow to the MSME sector, apart from the adverse impact on growth, had serious implications on the creation of jobs. Employment generation had been decelerating from 2.02% in the 1980s to 1.54% in the 1990s and 1.47% in the 2000s. During 2010–18, it shrank to 0.03%. We entered an era of jobless growth primarily because of the stagnant informal sector that bore the brunt of demonetisation and later the implementation of GST.
With unemployment rising and wages stagnating, the consumption in rural areas declined in absolute terms between 2012 and 2018, something unheard of ever since the rounds of consumption surveys were initiated. Also, for the first time since the poverty count started, the poverty ratio has tended to rise. Between 2011–12 and 2019–20, it is estimated to have risen from 21.9% to 25.9%.
The above being the economic disaster and the indescribable misery that demonetisation brought to most of the population, two questions arise: Why was this stupidity done? How did the prime minister get away with it?
Windfall gain of Rs 3–5 lakh crore: I think the key decision-makers were fully convinced that the notes ban would result in unearthing of black money and a windfall gain of Rs 3–5 lakh crore. The people with unaccounted money would not dare to approach the banks for exchanging their black money and to that extent, the liabilities of the RBI would be reduced. I still remember the late Arun Jaitley explaining this ingenious scheme to some of us state finance ministers.
I was left wondering how such a horrendous misunderstanding of the nature of black money could arise. Black money is not a stock; it is a flow. It is being continuously generated through illegal activities and perfectly legal ones whose surpluses are evaded from the tax authorities. The stock of black money is not kept in a sackful of notes but invested in assets or activities in India or stashed away abroad. Black money cannot be destroyed by notes ban. This simple fact was eloquently demonstrated when 99.3% of Rs 500 and Rs 1,000 notes came back to the banks for exchange.
Changing narratives: As the above reality dawned, a new narrative was spun. The move had a much larger objective of moving the economy to digital currency, which would enable close monitoring of economic transactions and widen the tax base. Now, five years after the notes ban, the RBI has informed us that the value of notes in circulation has increased from Rs 17.97 lakh crore in November 2016 to Rs 29.44 lakh crore in November 2021—an increase of nearly 64%.
Other sub-narratives such as destruction of fake currency and throttling of money to extremists also emerged, of which less said the better. The fake Rs 2,000 notes are back with a vengeance and the official statistics for the number of deaths in extremist action have steadily increased from 164 in 2015 to 387 in 2018.
Question of decision-making process: No economist, even the most neoliberal one, would have prescribed such stupidity. The essence of monetarism is that policymakers don’t tinker with money. Hold the money in constant proportion to the GDP and the market would take care of the rest. To see his devotees in India not just tampering with money but even abolishing it would have made Milton Friedman turn in his grave.
The whole episode is a sad commentary on the economic decision-making process under the Modi regime. Outside a very close circle, nobody, including the formal economic advisers, knew anything about what was in the making. Then who made this economic concoction for the ills of India? Not economists but some economic quacks behind the scenes. Whoever it be, it does not augur well for the country.
Getting away with it: Having brought this economic disaster on the country, there was not a single statement of regret, introspection or even justification from the powers that be. Even the victims do not seem to fault the perpetrators of the crime. The official narrative on demonetisation seems to have been accepted—it was a surgical strike against black and fake money, even if it failed. There were long queues and hardships but what is it when compared to the hardships of our brave soldiers battling the black money-financed extremists? Did not the rich also stand in queues and shed tears?
The prime minister shocked the nation with his night proclamation against black money. The same night, I held a press conference in my chamber describing it as an act of madness. But many friends and foes advised me against being hasty, lest be regarded as in favour of black money. Successful changing of narratives kept the disaster covered and the shock therapy has shifted to new scenes. The colossal failure is ignored and buried in silence.
T M Thomas Isaac, Former finance minister of Kerala (email@example.com)