Two years on: Note ban had no economic rationale
It was a disruptor, taking policymakers’ eyes off the bad-loan problem
When the definitive history of the Narendra Modi government gets written, there is little doubt that demonetisation will be judged as a mistake. India was suffering no hyperinflation or loss of faith in its currency calling for a radical recall of notes for restoring macroeconomic stability and credibility of the issuing authority. Demonetisation proved to be not just an unnecessary disruptor — growth slipped to 7.1 per cent in 2016-17 and 6.5 per cent in the following fiscal — but also took the eyes of policymakers off the real problem inherited from UPA: The mountain of bad loans weighing down public sector banks. This needed immediate fixing, which the Modi government initially seemed keen on. The Reserve Bank of India (RBI), in April 2015, forced banks to recognise the true extent of their non-performing assets and provide fully for these. This was followed by the announcement of a ~1.8 trillion plan for recapitalisation of PSBs in August 2015 and then the landmark Insolvency and Bankruptcy Code (IBC) being enacted in May 2016.
However, the focus was lost with demonetisation, as the attention of the RBI and banks shifted to facilitating the deposit and exchange of the scrapped notes and remonetisation of the economy. But more than slowing growth and derailing reforms, demonetisation inflicted avoidable pain on farmers, daily wage labourers and informal enterprises used to transacting in cash. Nor did it deal a body blow to black money. The promised windfall of ~4-5 trillion proved a chimera.