An economic disaster or a political masterstroke?

Demonetisation appears to have failed to achieve its economic goals and political results remain uncertain but PM says BJP’s poll victories postnote ban show people’s support

Speaking at a public rally in Goa, a few days after announcing demonetisation , PM Narendra Modi had asked for 50 days from the people for note-ban related hardships to end.

It has been 100 days since Modi announced the scrapping of 86% of India’s currency in circulation. With a large number of ATMs still running dry, there seems to be no end to people’s difficulties even now. Despite government’s claims of remonetisation being complete, latest data (till 20 January, 2017) shows that currency with public is still 40% less than what it was a year ago (see box). An even more important question is, how successful has demonetisation been in achieving its stated objective? PURGING BLACK MONEY It was argued by the supporters of demonetisation that a large amount of money in circulation would not come back to the system, as holders of illicit wealth would be wary of prosecution by tax authorities.

More than a month after the completion of deadline for depositing old notes with banks, the RBI claims that it is still counting the money which has been returned. Unless final figures are released there would not be any clarity on the amount of money which has been flushed down the pit or found to be counterfeit currency.

However, a part of finance minister Arun Jaitley’s budget speech suggests that hopes of unearthing a significant amount of black money might not materialise. Calculations based on Jaitley’s budget speech show that ₹10.38 trillion, almost two-thirds of the value of demonetised currency, had come back in deposits which were more than ₹ 2 lakh. Out of this, ₹4.89 trillion has come in deposits of ₹80 lakh or more. It is likely that those who have made such high value deposits are confident of dealing with tax department’s queries, which diminishes hopes of a windfall in unearthing of black money. On the other hand, government’s reply to a parliament question suggests that only ₹19.5 crore has been seized in fake currency since the demonetisation decision. COLLATERAL DAMAGE There is a broad based consensus on the fact that liquidity squeeze after demonetisation would have an adverse effect on economic activity. India’s GDP growth is expected to come down by 20 basis points in 2016-17 from 2015-16 according to first advanced estimates released by central statistical organisation. Industry is expected to suffer the biggest setback in terms of growth rate in this financial year.

Data on rural wages, which is released by the RBI, shows that non-agricultural wages have done much worse in comparison to agricultural wages in the months of November and December. RBI’s quarterly consumer confidence survey, carried in six metropolitan cities, shows that negative perception about employment was at its highest level in December quarter since Modi government assumed office in 2014. These statistics suggest that demonetisation’s recessionary impact might have been more severe in the non-farm economy.

Prima facie, it appears that demonetisation has failed to achieve its stated objectives of purging black money and fake currency from the Indian economy and would inflict significant costs – even if transient in nature – on the Indian economy. None of this seems to be bothering PM Modi though, who claimed in a UP rally that BJP’s victory in all polls after note ban shows that the poor are overwhelmingly supporting this policy.

There is nothing surprising about the fact that 100 days after note ban, people are more concerned about results of ongoing polls than exact count of notes which have returned to the RBI.