Demonetisation | Six years later, benefits far outweigh the temporary discomfort

It was on November 8, 2016 that the Indian government announced the demonetisation of Rs 500 and Rs 1,000 currency notes. (Representative image)

Two events that threw Indians off their feet in recent times were demonetisation in 2016, and the countrywide lockdown for COVID-19 in 2020. Both were bolts from the blue that took the nation by surprise, jolting economic activities to standstill.

Now five years after demonetisation and nearly three since the COVID-19 lockdown, the jury is still out on the impact of both these mega disruptions. The trenchant critics of Prime Minister Narendra Modi assert both the experiments were unmitigated disasters. They label those trying to defend the decisions as apologists of the ruling dispensation.

Between these two extreme viewpoints, it is true that a sizable section of the intellectual class thinks both interventions were unnecessary or, in the least, poorly planned and executed. They think neither demonetisation nor the lockdown served its ostensible purpose. Though experts continue to debate with the wisdom hindsight, the ordinary people seem to have moved on from these interludes in the long life of a nation.

Passage of time has set into motion a cycle of counterfactual analysis. Comparing India’s post-pandemic economy with other major economies, there appears to be a reluctant admission that these ‘draconian’ measures have stood India in good stead. Cynics, however, hasten to add that the benefits, if any, were unintended consequences, and not a planned outcome of the moves. Here, we need to bifurcate the discussions between demonetisation and the lockdown. The latter may be the subject for another day. But, half a decade later demonetisation certainly warrants a revisit after cleansing the old lenses.

A trait of the Modi style of governance has been a larger agenda that goes beyond the stated objective. There is usually a bigger game plan that becomes obvious in retrospect. A case in point has been its JAM (Jan Dhan – Aadhaar – Mobile) strategy which ensured last mile delivery of social welfare schemes without leakage, especially during the pandemic. Similarly, to think the sole purpose of demonetisation was one time mopping up of black money would be missing the woods for the trees.

It would be equally fallacious to judge the results of demonetisation by the amount of cash circulating in the economy today as compared to November 8, 2017. The increase in digital transactions through UPI (Unified Payment Interface) which is often cited as an achievement is also not a virtue by itself. The real benefit of demonetisation comes from the formalisation of the economy, which is a major piece of the government’s strategy for managing the economy.

Modi has been at the receiving end of derisive comments from many politicians and economists about his knowledge of economics. But they probably underestimated his native financial instincts. The current government is well aware that black money cannot be eliminated by a single silver bullet or a magic wand, and that one can only make creeping inroads into the dark informal economy by a series of measures, the foremost among them is to bring greater volume of business transactions above board. The difference between the Modi government and others is that effective steps have and are being taken to formalise the economy and bring greater volumes of business above board.

Notwithstanding his jibes about MNREGA and flags he has raised about the freebies culture, the politician in Modi knows that it would not be easy to shed the legacy of populist policies in a hurry. Therefore, there is no way the government can provide for these outgoes on subsidies and doles unless it increases the base for direct and indirect taxation.

In a country where only five percent of the population pay income tax, in the short run the tax cache can only be enlarged by spreading the indirect tax net wider. This is precisely what the GST (Goods and Services Tax) managed to do despite problems in implementation. Demonetisation has by accelerating digitisation pushed the iceberg of the dark economy above sea level. A collateral benefit has been increasing compliance on income tax and enrolment of new taxpayers. The results are visible in higher revenue collection despite an economic slowdown that has enabled the government to finance welfare schemes during a humanitarian crisis.

Thus on the sixth anniversary of demonetisation the score is 1:0 in favour of the Modi government.