Was de­mon­e­ti­za­tion worth it?

Mint ST - - MARK TO MARKET - Aparna Iyer aparna.i@livemint.com

Now that the Re­serve Bank of In­dia (RBI) has given some de­tails of the im­pact of de­mon­e­ti­za­tion in its an­nual re­port, the ques­tion on every­one’s lips is: Was de­mon­e­ti­za­tion worth all the dis­rup­tion?

The an­swer to this ques­tion is a yes and a no.

Nearly 10 months ago when Prime Min­is­ter Naren­dra Modi through a speech purged Rs15.44 tril­lion of cash held by the coun­try’s cit­i­zens, it was touted as a mas­ter­stroke that would rid the coun­try of il­licit money.

The pitch for de­mon­e­ti­za­tion was that the bulk of high-value notes of Rs500 and Rs1,000 were stored as il­licit wealth, be­sides be­ing eas­ily coun­ter­feited to fund il­le­gal ac­tiv­i­ties.

Fast for­ward to to­day and the num­bers in the an­nual re­port of the coun­try’s mon­e­tary author­ity show that some of this is true.

Let us set aside the ar­gu­ment that black money re­sides not just in cash but in real es­tate, off­shore in­vest­ments and other routes.

The num­ber of sus­pi­cious trans­ac­tions re­ported by banks to the Fi­nan­cial In­tel­li­gence Unit in fis­cal year 2017 (FY17) has surged to 361,214 from just 61,361 in the pre­vi­ous year. Add the fact that 98.96% of the high-value notes re­turned to the banking sys­tem, and it would seem that il­licit money did find its way back into the sys­tem.

But now what? Fidu­ciary agents should have sprung to ac­tion, which is not ev­i­dent. Pub­lic state­ments by the rev­enue depart­ment and other of­fi­cials have at best been pithy as­sur­ances rather than data or facts.

The ar­gu­ment of fake notes too seems to have held up a bit. In FY17, fake notes de­tected rose 20% from the pre­vi­ous fis­cal fig­ure but what was telling is that fake pieces of Rs1,000 de­tected rose a mas­sive 79%. But even then, the to­tal de­tec­tion is less than 1% of the to­tal cur­rency pieces in cir­cu­la­tion. Al­ready, fake pieces of the new Rs,2000 and Rs500 notes have been de­tected.

Which brings us to whether de­mon­e­ti­za­tion cleaned up busi­nesses or in­di­vid­ual be­hav­iour. It is tough to say so con­vinc­ingly. There is no guar­an­tee that the new notes won’t be used to store il­licit money, they are al­ready 50% of to­tal cur­rency in cir­cu­la­tion be­cause of rapid re­mon­e­ti­za­tion.

An un­in­tended ben­e­fit that de­mon­e­ti­za­tion has given is the fall in in­ter­est rates after the sur­feit in liq­uid­ity—this has helped bor­row­ers, but hurt savers. Also, Indians have be­gun to trans­act dig­i­tally more often than be­fore as the surge in dig­i­tal trans­ac­tions shows. But we still have a long way to go. After all, 99% of the de­mon­e­tized cash by value is back into the economy, ac­cord­ing to RBI.

At what cost have these ben­e­fits come?

It is worth a re­peat that de­mon­e­ti­za­tion hurt ev­ery nook and cor­ner of the economy. In­dus­trial out­put crashed, ser­vices growth slowed and eco­nomic growth de­cel­er­ated, best shown by the mas­sive fall in growth ex­clud­ing agri­cul­ture and gov­ern­ment spend­ing.

What will in­deed make Indians pay more taxes are the tax re­forms and the laws to mon­i­tor real es­tate. RBI be­lieves that the harm­ful ef­fects of de­mon­e­ti­za­tion on the economy are tran­sient. The gov­ern­ment needs to en­sure that its ben­e­fits are not.


The Re­serve Bank of In­dia be­lieves the harm­ful ef­fects of de­mon­e­ti­za­tion on the economy are tran­sient. The gov­ern­ment needs to en­sure that its ben­e­fits are not.

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