Anti-black money day: Celebrating epic failure?

A NATION’S RANKING on the World Bank index is based on the average of 10 sub-indices. India has done better on three indicators: insolvency reforms, company registration and protection of investors. Though India has improved its ranking, there is little c

One thing that the Modi government is well known for is the art of obfuscation. From political messaging, managing headlines, juggling numbers, blurring facts and changing narrative to stupefy people, the government has often done its best to deflect attention by weaving its own story to score political points. The case with demonetisation is no different. Claiming that it has served all its goals, the government will celebrate the first anniversary of demonetisation as antiblack money day tomorrow. However, all available data proves that demonetisation was an epic failure.

A lot has happened in the last one year since high value currency notes were junked on the night of November 8, 2016: long queues outside banks and ATMs, massive cash crunch, deaths, loss of jobs, shutting of several small businesses, contraction of GDP and 99 per cent of outlawed currency back into the system. Demonetisation was a highly contentious decision which had a serious impact on the lives of common people and the economy. As the real costs of demonetisation have started to come out only recently, observing anti-black money day is obviously an attempt on the government’s part to divert attention from failure of the monumental blunder which failed to purge unaccounted money. Hence celebrating this epic failure is not entirely unexpected.

Any administrative or policy decision has to be judged by the benefits it delivers or detriments it causes to the country and its citizens. No relatively healthy economy has ever carried out demonetisation. Historically, all demonetisations have occurred, as the Economic Survey of India pointed out, in the context of hyperinflation, wars, political upheavals or other extreme circumstances. “But India’s demonetisation”, as the survey noted, “is unprecedented in international economic history, in that it combined secrecy and suddenness amidst normal economic and political conditions.”

That the country has paid a huge price for the misadventure in terms of personal hardship and GDP growth is unlikely to be acknowledged by the government. The government’s claim that currency in circulation has come down significantly from 12 per cent before demonetisation to 9 per cent now is also not true. It was 9 per cent in March 2017, when remonetisation of economy was under progress. As on October 6, according to RBI, the currency in circulation is 16.004 lakh crore, which is about 90 per cent of pre-demonetisation days. The ratio of cash in circulation to GDP is never constant but moves up when GDP declines and goes down when GDP grows.Demand for currency is largely determined by economic, cultural, technological and sociological factors.

India’s currency in circulation to GDP ratio at 12 per cent before demonetisation was described by the government as very high. Most countries in the world have a ratio of 4 per cent. However, countries like Japan and Hong Kong, according to The Curse of Cash by Kenneth Rogoff, have a higher ratio than India, while Switzerland and Thailand have a comparable ratio with India.

Demand for currency is also determined by population. India is world’s second largest country in terms of population. At around Rs 14,000 for each citizen, India has one of the lowest cash per capita, while countries like Sweden, Norway and Canada with lowest currency to GDP ratio have much higher per capita currency.

India is not a structurally evolved economy. To force a developing economy – with 70 per cent rural population, poor infrastructure and large scale economic backwardness – to cut down its dependence on cash in absence of structural reforms was bound to have deleterious consequences on growth. There is little justification for government to celebrate November 8 as anti-black money day when the common man, particularly the bottom 50 per cent of the population which accounts for only 15 per cent of the national income, has paid a heavy price for it. On the contrary, the opposition is justified in observing November 8 as ‘black day’ because note ban caused huge losses to the unorganised sector and contracted economic growth by about 1.5 per cent.

Parallel or black economy should have been tackled by means other than demonetisation as black wealth does not mean cash alone. Therefore oneshot flushing out of cash is not the solution to deal with black wealth. Within a month of announcing demonetisation, the government also realised that its note ban decision was likely to fail. It’s not surprising that the goalposts started changing. Now the government is saying demonetisation was one of the means of formalising the economy by bringing into the system unaccounted money and increasing the tax base. If that was indeed the goalpost then it should have implemented GST six months earlier instead of going for demonetisation.

There is little substance in government’s argument that with all the exterminated cash having come back into the system, it will help track generators of black income. Large deposits by individuals and businesses do not mean only black money. It will be an arduous task for tax authorities to prove that large deposits were actually the result of black income generation activities. It is a long-drawn out process, from issuing notices to filing of replies, appeals, adjudication and even litigation. Past experience tells us that nothing really comes out of it eventually.

There is difference between managing economy and managing headlines. The economy is managed by policies and headlines by events. The Modi government is well known for dressing up for the occasion to grab headlines. Last week the government got into self-congratulatory mode over the World Bank’s latest Ease of Doing Business ranking for India’s 30notch jump to 100th place, though India is well behind Bhutan and China and its performance on macroeconomic indicators like per capita income growth and efficiency of capital is poorer than some of its South Asian neighbours.

A nation’s ranking on the World Bank index is based on the average of 10 sub-indices. India has done better on three indicators: insolvency reforms, company registration and protection of investors. Though India has improved its ranking, there is little change in business climate.

There are other indices which are equally or more important for setting national priorities and policy decisions. For instance, India’s ranking – 100th out of 119 countries – on Global Hunger Index is nothing to cheer about. At 131 out of 168 countries, India also fares poorly on Human Development Index.

The best minds on economics have debunked demonetisation. Sadly, the government thinks otherwise.