No matter how Narendra Modi’s tenure as Prime Minister of India is discussed by historians years from now, his dramatic decision on November 8, 2016 will be discussed threadbare by economists, historians and political scientists alike. Was it an inspired decision that curbed untraceable money in the economy and increased tax collection by formalising the economy? Was it a cynical move aimed at upending the Opposition ahead of the Uttar Pradesh Assembly poll? Or was it a move based on bad economics pushed through by nationalist economic zealots that led to the economy crashing into a brick wall, destroying the informal economy and torpedoing jobs? Many a thesis will be written and possibly dozens of doctorates too as well as a few best-selling books. No matter what happens in the upcoming General Election, the high value note ban will not be forgotten in a hurry.
But there are cogent arguments to be made on both sides. It was an economic shock and the short-term impact of that shock was quite dramatic, to say the least. In an age of viral videos, thousands standing in serpentine queues, tempers fraying and even some deaths made it onto social and the mainstream media. Conspiracy theories abounded, including the rather hilarious one where people suspected that each new 2,000 note had a micro-tracker inside it for the Government to monitor transactions. It divided opinion, as did the new currency notes with the shocking pink of the new 2,000 rupee note getting special rap for looking like ‘Monopoly money’. Indeed, the colours on the new currency notes, including the recently reissued 100 rupee note, do make them stand out in a wallet. And the smaller size of the notes relative to earlier Indian currency notes did make them fit into standard-size wallets better. That said, proponents of the scheme keep on highlighting the claim that the move transformed India’s largely informal economy into a formal one and stopped the huge incidence of cash transactions, which had hitherto evaded the tax system. The growth in income-tax assesees over the last two years is proffered as evidence. Just like the Goods and Services Tax shook up the indirect tax system, demonetisation, it was said, shook up the direct tax system. Proponents also claimed that the move kickstarted India’s digital payments economy and the Government’s move to double down on that by creating the Unified Payments Interface (UPI) system must be commended. The move did have a dramatic impact on the general population which moved, albeit hesitantly, into the formal banking system. But one wonders how many of the accounts created in the aftermath of the note ban are still used regularly today.
Frankly, it is too early to properly judge demonetisation as the medium-term impacts of the move are just about kicking in. It is almost certain that even a decade hence there will continue to be some impact of demonetisation; if nothing else, as an electoral issue. Proponents and critics on either side of the demonetisation divide continue to build a narrative around the move that suits them politically. Truth be told, the positives and negatives are both in evidence. A reasoned study will only come in time.
Writer & Courtesy: The Pioneer