Demonetisation, a poison pill
Neither tax collections nor compliance increased after
demonetisation
BY...
ements mann oF INIA
BAN S4951O
Five years after the demonetisation of currency notes of higher denominations
was announced by Prime Minister Narendra Modi in November 2016, there is no
evidence that it has helped the economy, but there is plenty to show that it has
damaged it. What was presented as a magic remedy to cure many ills of the
economy turned out to be a poison pill whose negative impact is still being felt.
The country’s GDP growth rate which was 8% the previous year, started falling
after that and has never recovered. Demonetisation was a major reason for that
because it led to the collapse of much of the informal sector which accounted for
a large part of the economy. Millions of small businesses, which had no
sustaining power, were killed off in a few days by the liquidity crunch. Even the
organised sectors were adversely affected by the shortage of currency and lack
of demand,
The PM had said that demonetisation was meant to flush out black money. He
wanted people to bear the pain for 50 days to help him deliver the India of "your
dreams", But it turned out to be a nightmare. In about 50 days, 99% of the
demonetised currency had returned to the Reserve Bank of India (RBI), Much of
the money returned in bunches, That meant it was mostly black money, and that
demonetisation provided hoarders an opportunity to turn it into white money.
The cash to GDP ratio, which was 8.7% in 2016-17, increased to about 15% in
2020-21, Neither tax collections nor compliance increased after demonetisation.
There was no impact on the generation of black money, which still pervades allsectors of the economy. The government tried to shift the goal post and claimed
that demonetisation was intended to enable a shifi to a cashless economy. The
digital economy and transactions have grown since then but that is more because
of the spread of mobile broadband and the incidence of the Covid-19 pandemic.
It was the justification of a wrong action in retrospect.
Demonetisation will also be remembered for the wrong way it was done. It was
done apparently without any study of its consequences. There was no prior
consultation with the RBI, which was asked to endorse the government’s
decision. It did so and damaged its own credibility. The decision could not even
be called the government’s, because it was taken by one person or perhaps two
who had no known credentials or expertise to take such a decision. It was an
authoritarian act and showed a penchant for drama and posturing. Its postscript
is pain inflicted on people, most of them poor, who were made to pay for a
fanciful idea that is still hurting the country.