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Last Updated : Nov 19, 2018 04:32 PM IST | Source: Moneycontrol.com

Podcast | Deep Dive: Two years after demonetisation- Did the enthusiasm finally dwindle?

This Moneycontrol Deep Dive will explore a lot more than just trivia, it will be interesting to recall just how much popular support was drummed up for demonetisation in the days that followed the late evening order on November 8, 2016.

On the second anniversary of demonetisation, let us go back in time to dig up a little bit of trivia. In 1978, comedian I. S. Johar made a satirical film called Nasbandi. The film starred lookalikes of major stars and mocked the forced sterilization drive during Emergency.

Not surprisingly, the film was banned after its release. Another film on Emergency was Kissa Kursi Ka, a 1977 satire by Amrit Nahata, and its prints were confiscated for obvious reasons.

Cut to last year. In April 2017, a Bengali film named "Shunyota" (Emptiness) was released to explore the impact of the demonetisation drive on the citizens. Before the film directed by Suvendu Ghosh hit the theatres, it faced what was according to the director, a "consolidated effort" to block its release. The film was finally released after six cuts that included beeps muting certain negative comments made by the protagonists.


Now according to a report, Vishesh Bhatt and his team are making a comedy about demonetisation. And why are we telling you this? Well, just to bring home the point that certain political events not only impact the lives of citizens in a far-reaching way, but they also shape popular culture too indelibly.

This Moneycontrol Deep Dive will explore a lot more than just trivia, it will be interesting to recall just how much popular support was drummed up for demonetisation in the days that followed the late evening order on November 8, 2016. This was when Prime Minister Narendra Modi had announced that all Rs 1000 and Rs 500 notes, comprising more than 85 percent of the total value of the currency in circulation at that time, would no longer be recognised as legal tender.

As if on cue, there were radio campaigns following the tumult, shaming people who felt inconvenienced by the long queues outside ATMs and in banks. Reminding them of soldiers on the borders and their dues to nationalism. Even though, 115 people reportedly died standing in queues to withdraw money from their bank accounts.

There was Amitabh Bachchan evoking the power of pink in praise of the new currency notes while also promoting his own film of the same hue. Ajay Devgan talked about a 'sunar' and a 'lauhar' and we will not even try to translate the Hindi idiom because it is untranslatable but well, you get what he was trying to say, don't you?

And yes, there were those front page ads telling us to adopt digital money, in particular, the convenience of a conduit called PayTm.

Demonetisation was a move, we were told, that would stop the inflow of fake currency from across the border, end terrorism, dig out black money stuffed in people's mattresses and there was that reporter, in a now-viral video, talking in all seriousness about the fabled nano chip that would locate black money no matter how deep it was buried!

Two years later, the euphoric cheerleaders have grown silent.

Remembering the voices of caution

Despite the optimism being streamed from every available platform in the early months of this historic move, there were enough naysayers to offer a dissenting view.

In an interview to NDTV in November 2016, Nobel Laureate and eminent economist Amartya Sen had said, "The demonetisation of currency was a despotic act as the government broke the promise of compensation that comes with a promissory note. Demonetisation goes against the trust. It undermines the trust of the entire economy."

He also told The Indian Express, "Only an authoritarian government can calmly cause such misery to the people - with millions of innocent people being deprived of their money and being subjected to suffering, inconvenience and indignity in trying to get their own money back."

Economist Kaushik Basu wrote in The New York Times, "Demonetisation was ostensibly implemented to combat corruption, terrorism financing and inflation. But it was poorly designed, with scant attention paid to the laws of the market, and it is likely to fail. So far its effects have been disastrous for the middle- and lower-middle classes, as well as the poor. And the worst may be yet to come."

In December 2016, Chairman and Editor-in-Chief of Forbes Media, Steve Forbes wrote a piece with the following scathing headline, "What India Has Done To Its Money Is Sickening And Immoral."

And more recently, in April 2018, former RBI governor Raghuram Rajan said in no uncertain terms that he had made it quite clear to the government that demonetisation was "not a good idea" and that its implementation was "not well-planned" since 87.5 percent of the currency was being demonetised. That he parted ways from the government's think tank is common currency now,

But coming back to the Forbes piece, Steve had written, "In November, India's government perpetrated an unprecedented act that is not only damaging its economy and threatening destitution to countless millions of its already poor citizens but also breathtaking in its immorality. Without any warning, India abruptly scrapped 85 percent of its currency. That's right: Most of the country's cash ceased to be legal tender. Shocked citizens were given only a few weeks' notices to take their cash and turn it in at a bank for new bills."

He went to systematically offer points to support his argument including the fact that the government didn't print a sufficient amount of the new bills which were also a different size than the old ones, creating a huge problem with ATMs.

But the most important point he made was that demonetisation totally disregarded the fact that India's economy is based mostly on cash and an inordinate number of people live in dire poverty. This oversight meant that small businesses dealing primarily with cash transactions gasped for breath, affecting the poor the most.

He also did not shy from making some uncomplimentary comparisons, "Not since India's short-lived forced-sterilization program in the 1970s--this bout of Nazi-like eugenics was instituted to deal with the country's "overpopulation"--has the government engaged in something so immoral. It claims the move will fight corruption and tax evasion by allegedly flushing out illegal cash, crippling criminal enterprises and terrorists and force-marching India into a digitized credit system."

He opined that India was the most extreme and destructive example of the anti-cash fad currently sweeping governments and the economics profession. But there's no misunderstanding, said he, what this is truly about: attacking your privacy and inflicting more government control over your life.

But his most damning comment was this, " India's awful act underscores another piece of immorality. Money represents what people produce in the real world. Governments don't create resources, people do. What India has done is commit a massive theft of people's property without even the pretence of due process--a shocking move for a democratically elected government."

Not surprisingly, the government is downplaying the fact that this move will give India a onetime windfall of perhaps tens of billions of dollars. By stealing property, further impoverishing the least fortunate among its population and undermining social trust, thereby poisoning politics and hurting future investment, India has immorally and unnecessarily harmed its people while setting a dreadful example for the rest of the world."

And we will not repeat similar sentiments expressed by a former Prime Minister because his words of caution could then have been easily dismissed as politically motivated. We will though examine if two years later, his fears were prescient or not.

The present continues to be tense

Cut to 2018, and the aftershocks of demonetisation are still being measured. And as Hindustan Times reported, former prime minister, and also noted economist Dr Manmohan Singh, has once again issued a warning that the impact of the note ban was just beginning to manifest in a depreciating currency and the disorienting swirls of macroeconomic headwinds would continue.

Singh said in the HT report, that beyond the steep drop in GDP growth numbers after demonetisation, the deeper ramifications were still unravelling for small and medium businesses that are the cornerstone of India’s economy. The sluggish employment rates, volatile financial markets, liquidity crisis and the eventual toll on infrastructure lenders and non-bank financial services firms are some of the points cited by him as he finally says, "Today is a day to remember how economic misadventures can roil the nation for a long time and understand that economic policymaking should be handled with thought and care.”

Minister of Finance and Corporate Affairs Arun Jaitley though differs vociferously and has said that demonetisation was needed to shake the system. Interesting choice of words that but then as his critics would say, there is a fine line between a stagnant system being stirred into wakefulness and being shaken. Or broken, we may add.

The demand for a white paper on the move has been made not just by the opposition parties but media observers but as of now, the government shows no signs of acknowledging that the move did not yield all that it had promised.

There have also been uncomplimentary comparisons to a certain Sultan Muhammad bin Tughlaq and his monetary misadventures in the 14th century, but we are digressing.

In August this year, RBI stated in a report that over 99 percent of the Rs 500 and Rs 1000 notes that were withdrawn from circulation in November 2016 were returned. In fact, many reports have stated subsequently that there is more cash in circulation today than there was in 2016. And that fact speaks for itself, really.

Far-reaching impact

Two years down the line, the hows, whys and wherefores of demonetisation continue to be discussed. Many news sources have cited former RBI Governor Raghuram Rajan's statement that demonetisation and the Goods and Services Tax (GST) are the two major headwinds that held back India's economic growth last year. He also said, that the current seven percent growth rate is not enough to meet the country's needs.

Significantly, current RBI Governor Urjit Patel had little to say in the wake of demonetisation and is only now beginning to show an unwillingness to comply with government's attempts to ease lending restrictions.

But coming back to demonetisation, The Indian Express recalled in November 2018, how the move led to days of acute liquidity shortage, long queues outside banks, a reeling economy, with demand falling, businesses facing a crisis, and GDP growth declining close to 1.5 percent. Many small units were hit hard, with many reporting huge losses even after nine months, says the report.

The pace of remonetisation was slow thanks to the ATM machines that had to be recalibrated as they were not manufactured for the sizes of the new Rs 2000 and Rs 500 notes.

"The central government and the RBI issued 74 notifications during its execution period of 50 days that included several rollbacks. After demonetisation was announced, the government had allowed the exchange of Rs 500 and Rs 1,000 notes at all banks and RBI branches till December 30, 2016. It had initially allowed withdrawal of only Rs 2,000 per day per card (via ATMs) and over-the-counter exchange of Rs 4,000 per day per account, but increased this to Rs 2,500 and Rs 4,500 respectively on November 13."

"It later limited the over-the-counter exchange of currency to Rs 2,000 on November 18, before stopping the facility all together on November 24, 2016."

The RBI had initially mandated a copy of PAN card while depositing over Rs 5,000 in old denomination notes but withdrew this condition on December 21, 2016.

Senior Congress leader and former finance minister P Chidambaram added to the gloom with the following statement and we are sharing it only because it rattles off a few relevant numbers.

“Over 100 lives were lost. 15 crore daily wage earners lost their livelihood for several weeks. Thousands of SME units were shut down. Lakhs of jobs were destroyed. Indian economy lost 1.5 percent of GDP in terms of growth. That alone was a loss of Rs 2.25 lakh crore a year.”

Interestingly, former finance minister Yashwant Sinha and erstwhile BJP stalwart has also called demonetisation an “unmitigated economic disaster“.

The beginning was auspicious though as Yashwant Sinha wrote in a now famous piece in Express in September 2017.

He had pointed out then that Arun Jaitley was, to begin with, a lucky finance minister, luckier than any in the post-liberalisation era. Depressed global crude oil prices placed at his disposal lakhs of crores of rupees.

This unprecedented bonanza was waiting to be used imaginatively. But the oil bonanza, he said, has been wasted and the legacy problems have not only been allowed to persist but have also become worse.

"So, what is the picture of the Indian economy today? Private investment has shrunk as never before in two decades, industrial production has all but collapsed, agriculture is in distress, construction industry, a big employer of the workforce, is in the doldrums, the rest of the service sector is also in the slow lane, exports have dwindled, sector after sector of the economy is in distress."

"Demonetisation has proved to be an unmitigated economic disaster, a badly conceived and poorly implemented GST has played havoc with businesses and sunk many of them and countless millions have lost their jobs with hardly any new opportunities coming the way of the new entrants to the labour market. For quarter after quarter, the growth rate of the economy has been declining until it reached the low of 5.7 percent in the first quarter of the current fiscal, the lowest in three years. The spokespersons of the government say that demonetisation is not responsible for this deceleration. They are right. The deceleration had started much earlier. Demonetisation only added fuel to fire."

And finally he made the most hard-hitting of swipes, "Economies are destroyed more easily than they are built. Nobody has a magic wand to revive the economy overnight. Steps taken now will take their own time to produce results. So, a revival by the time of the next Lok Sabha election appears highly unlikely. A hard landing appears inevitable. Bluff and bluster is fine for the hustings, it evaporates in the face of reality. The prime minister claims that he has seen poverty from close quarters. His finance minister is working over-time to make sure that all Indians also see it from equally close quarters."

A BJP think-tank study says that demonetisation unmasked urban naxals but we need time to first fully understand the purport of this statement and wait for some kind of a data to fathom just what is being conveyed here. But as The Guardian reported in August 2018, the original intent of demonetisation was something else.

The piece recalled, how as India’s massive informal economy reeled, the PM implored the country to give the policy time to work, arguing it would flush out untaxed wealth being hoarded by wealthy Indians, help to digitise the economy — one of the most cash-based in the world — and starve terrorists and criminal gangs of cash.

From non-compliance to compliance?

In keeping with the world-wide political tradition of shifting goal posts, Finance Minister Arun Jaitley has now said that demonetisation had achieved its larger purpose of moving India from a tax non-compliant society to a compliant society, resulting in the formalisation of the economy and a blow to the black money. Express quotes him, “The growth of income tax collections in the two years pre-demonetisation was 6.6 per cent and 9 per cent. Post-demonetisation, the collections increased 15 per cent and 18 per cent in the next two years and the same trend is visible in the third year."

Jaitley has further stated that the number of income tax returns filed had shot up to 6.86 crore in 2017-18, from 3.8 crore in 2013-14. In the last two years, the IT returns had increased 19 per cent and 25 per cent, he said and added that IT collections had increased from the Rs 6.38 lakh crore in 2013-14 to Rs 10.02 lakh crore in 2017-18.

The critics though continue to remind us that none of the original goals have been reached and as another Express editorial put it, demonetisation did not deal a body blow to black money; it, in fact, hurt farmers, daily wagers and informal enterprises. Gurcharan Das, an economist and author, was quoted in The Guardian too and he said that the positive side to the exercise was that money stashed at home had been injected into the formal banking system.

"Now all that money can be tracked and it goes into the formal economy and people who have deposited it back have bank accounts and become future taxpayers. It has helped India move faster towards a digital economy. It will result in India actually skipping the branch phase of banking. But this was not the way to do it. The cost to the people was high, and we lost about a year of economic growth by my estimates. And to solve the jobs problem in India you need to grow at about 8 percent for about 20 years.”

Some good news, finally or more bad news?

Bloomberg.com has however reported that India's growth has bounced back to reach 8.2 per cent last quarter, the fastest pace of any major economy. The World Bank in April stated as well in a welcome statement that the Indian economy appeared to have recovered from the temporary disruptions caused by demonetisation and the introduction of the GST. But despite projections of a 7.3 percent growth in 2018 and 7.5 per cent in 2019, it has shown concern over the fact that the country is not creating enough jobs. As the Bloomberg piece reported this month, data provided by a private research firm, the Centre for Monitoring Indian Economy Pvt., shows that 1.5 million jobs were lost immediately after the ban on large-denominated money notes in November 2016.

This should worry the government because one of campaign promises was to add 10 million jobs each year.

Faulty premise?

Vivek Kaul, the author of ‘India’s Big Government – The Intrusive State and How It is Hurting Us’, wrote in The Quint this month that the very idea at the core of demonetisation, that more cash means more corruption was rather faulty to start with.

He says, "Let’s take the case of Nigeria, which had a currency to GDP ratio of 1.85 percent in 2016. It is by far a more corrupt country than India is, though it has significantly less cash than India does, given its economic size."

"Or take the case of Brazil which had a currency to GDP ratio of 3.31 percent in 2016. It’s a country more or less as corrupt as India is. Or take the cases of Singapore, the Eurozone, Taiwan, Switzerland and Japan, with a currency to GDP ratio of 10.36 percent, 10.49 percent, 10.54 percent, 11.11 percent and 19.4 percent, respectively.

Each of these areas or countries had a currency to GDP ratio higher that of India in 2016. But none of these areas or countries is as corrupt as India is. This notion that a higher currency in circulation leads to more corruption and black money, is indeed a misleading one."

Arun Kumar, a Malcolm Adisesiah Chair Professor, Institute of Social Sciences and author of Demonetization and the Black Economy, Penguin (India), 2017, wrote in the Wire recently, something similar when he said that the narrative that demonetisation would destroy the wealth of the corrupt was widely accepted. And only because of the misperception that ‘black means cash’. And that, If cash was squeezed out, the black economy would disappear at one stroke – and justice would be meted out to the corrupt.

"The Prime Minister said that for long-term gain one had to bear the short-term pain. He likened it to ‘ahuti’ in a ‘yagya’. If the pain does not end in 50 days, Modi said, the public could give him any punishment and he would accept it."

Two years later, says Arun, the government has refused to admit to the long-term damage to the economy, especially to marginalised Indians in the unorganised sectors. Instead, data from the organised sector is used to claim that the economy has recovered to a 7-8 percent rate of growth. This is treated as evidence that the pain was temporary.

The government, says he, did not survey the unorganised sectors to find out what was happening there.

"The underlying assumption is that the shock to the economy did not require a change in the old methodology for calculating growth. In that methodology, the organised sector is more or less the proxy for the unorganised sector. But the shock to the economy changed the ratio between the organised and the unorganised sectors. So, the ratio used prior to November 7, 2016, was no more valid after November 8, 2016.

Data from private surveys showed that the unorganised sector was hit hard. Surveys were conducted by Punjab Haryana Delhi Chamber of Commerce and Industry (PHDCCI), All India Manufacturers Organization (AIMO), State Bank of India (SBI) and many others including NGOs. "

Agriculture, he reminds us, faced a crisis due to notes shortage because produce could not be sold, the sowing of crops was delayed and the demand for the perishables like vegetables collapsed. Prices fell sharply, thereby impacting incomes of farmers. Banking also went into a crisis since normal banking operations stopped for months. With industry, trade and agriculture facing a crisis, the problem of NPAs only increased.

Output, employment and investment declined, sending the economy into a tailspin from which it has not yet recovered.

He also strikes a worrisome note in anticipation of what may happen in the near future as he writes, "Institutions like the RBI were damaged. The roots of the current problems with RBI are also contained in the impact of demonetisation. It was believed that Rs 3 to 4 lakh crore would not return and would become available to the government to give to the poor. Since this did not happen, now a dividend is sought from RBI out of its reserves."

He also recalls that no one saw any rich people standing in the queues and they, he says, used various devices like Jan Dhan accounts, money mules and cash in hand to convert money.

Many also suspected that demonetisation was a political move to eliminate the black money hoard held by the opposition before the Uttar Pradesh assembly elections.

He further writes, "Since all the money has come back into the banks, in another spin, the government has argued that a paper trail is now available to track those generating black incomes. To support this argument, data is cited on the increase in direct tax collection and the number of taxpayers. Given the expansion of the organised sectors at the expense of the unorganised and the rising disparities, this is to be expected. Further, the number of direct taxpayers has increased due to the implementation of the Seventh Pay Commission award."

Bloomberg has also pointed out that another objective of demonetisation, that of formalizing an economy where more than 90 per cent of payments were made in cash, has also not been realised. Electronic transactions, the report states, went up sharply in November 2016 since most people had no option but to use digital wallets, credit cards or debit cards. It has lost steam since then.

And all the Bollywood style plans to nab counterfeit notes?

We quote Bloomberg again, "No high quality counterfeit new currency notes have been seized by any agency post demonetisation, and those seized in the recent past are scanned or photocopied notes. "

So what was the reasoning behind demonetisation and who benefitted from it apart from profit rakers like PayTM? As Vivek Kaul sums it up, "The best analysis of events like demonetisation happens in the years to come. By that time there is more data available. There is also a clear distance from the event at hand to do a more dispassionate analysis on whether what was supposed to be achieved has been achieved or not."
First Published on Nov 19, 2018 04:30 pm