WITH NEARLY ALL THE BANNED CURRENCY BACK IN THE BANKING SYSTEM, WHAT IS YOUR ASSESSMENT OF DEMONETISATION?
JEAN DRÈZE Development economist
My assessment is the same as before—demonetisation was a blunder and did grave injustice to the poor.
PRONAB SEN Economist
Whatever its political merits, as an economic measure, demonetisation was a bad idea. The return of practically all the cash into the banking system was expected since the basic premise of demonetisation that black money is held as idle cash was wrong ab initio. Hopefully, policymakers will now have a better idea of how the black economy functions.
SURJIT BHALLA Member, PM’s Advisory Council
It is a wrong metric to evaluate demonetisation by only the criterion of money returned. In fact, it is the weakest criterion. Nevertheless, the government and certain individuals had said Rs 2-3 lakh crore will not return to the system as people will not want to expose themselves. We were very naïve and not appreciating the ingenuity of the corrupt in India, who found all means to return the money. Yes, this was a very limited objective, and on this, demonetisation was a clear failure. Over the next few years, we will know if the corrupt were able to get away, or were found out and penalties were imposed.
N.R. BHANUMURTHY Professor, National Institute of Public Finance and Policy
It’s no surprise that most of the money is back in the banking system. And this by itself is not such a bad outcome in the short run. While there were many short-term costs—and these are well documented— the long-term benefits of demonetisation are still not clear. This would be a major empirical question for more research in the coming years. There are indications about a moderate increase in filing of income tax returns, which used to be quite low and could not augur well for a large, fastest-growing economy. Before demonetisation, there were efforts by several governments to increase the tax base and reduce black money. But none succeeded. There are still hopes that demonetisation, along with GST, will expand both the direct and indirect tax base and reduce the size of the black economy, whose estimates range from 25 per cent to 70 per cent!
MAITREESH GHATAK Professor of economics, London School of Economics
It has been a complete failure. The tragedy is that this was entirely foreseeable. At best, demonetisation would have had as much a lasting effect on curbing black money as a one-time effort to remove garbage would have on the quality of sanitation and hygiene. Black money generation is continuous and involves evading taxes and regulations as well as engaging in corrupt and criminal activities, which will continue unabated with the new currency.
Given that the affected currency notes constituted 86 per cent of the total volume of cash in the country, this policy effectively led to a much higher drop in liquidity than even the drop in the money supply (about 30 per cent) that the US Fed is criticised for during the Great Depression. Whatever be the illness, you don’t take 86 per cent of the blood supply out of a patient’s body. You would be exposing the patient to a serious health shock.
It is commonly agreed that demonetisation has knocked off at least a percentage point from the trend growth rate (even the Economic Survey says that between 0.25 and 0.5 percentage point of growth was lost relative to the baseline of about 7 per cent). In any case, these growth figures underestimate the impact of demonetisation on the informal sector.
Add to it the physical hardship imposed on citizens, such as the long queues at banks, and the strain on the banking sector, which resulted in some deaths.