Numbers revealed by the RBI bring into question one of the main reasons preferred for demonetization
The running joke about the events precipitated by Prime Minister Narendra Modi’s unexpected address to the nation on November 8, 2016, is that at the end of it, all we have are multicoloured currency notes, but at least notes that fit into our wallets better and Mahatma Gandhi faces the other way, but yes, the aesthetics of the new notes have to be debated but that is another story. But what was demonetisation all about? The ongoing narrative was that the Government was able to flush out a lot of illicit funds, black money apparently. Many people were expected to take a massive loss on their black money but Reserve Bank of India (RBI) has now said only around Rs 10,000 crore of the monetary value of Rs 500 and Rs 1,000 rupee notes in circulation before demonetisation were not submitted to the banks. Now, Rs 10,000 crore is not a figure to be sniffed at, but was giving the Indian economy (and several of its more elderly citizens) a heart attack the way forward. There are some positives beyond the new, nicer fitting banknotes to demonetisation. By flushing the system out, the Government got much of the money into the formal economy. At the same time, India’s tax departments, armed with new big data analytics and artificial intelligence software, is managing to analyse money movements far better than ever before. The new software has definitely made a difference in the way income tax systems work, and demonetisation has undoubtedly brought in more people into the tax fold. The events of November 2016 and its aftermath will be studied, not just in India, but across the world, because no other major economy has ever done such a thing without either being on the economic precipice (like Venezuela right now) or in the aftermath of war (post-war Germany).
But with the new Goods and Services Tax coming in the wake of demonetisation, the Modi Government’s moves thoroughly stirred up the Indian economy. Now, questions will always be asked whether demonetisation was brought in to destabilise the Opposition ahead of the crucial Uttar Pradesh election? That said, demonetisation impacted the chattering classes far more than they hit the large proportion of the Indian economy, and there was considerable schadenfreude among the general population seeing the rich and powerful running around like headless chickens for a few days. But numbers do not lie, cash has been replenished before the General Election next spring and the political economy of the country will be fairly flush with cash with several crucial State polls leading up to next spring. And in India separating politics and the economy is nigh-high impossible anymore. All one can expect is that there will be no major economic surprises in the coming months. However, if there is one major change that must come through it should be bringing in counterfeit proof polymer-based banknotes, because that is change we can do with.
Editorial: The Pioneer