The eyewash that is demonetisation

The RBI has reported that it has recovered Rs 29.84 crore worth of fake notes out of the currency taken back

Prime Minister Narendra Modi, during his November 8 announcement of “demonetisation” (I put it in inverted commas because it was not actually demonetisation in the real sense but a mere currency exchange) said that it was aimed at, first, ridding India of black money, second, filtering out counterfeit currency, and, three, bankrupting terrorist networks. 

Let us briefly examine how much he has achieved in his sought-for 50 days. 

The total estimated parallel economy is now commonly believed to be about 20-25 percent of the GDP, which means that the government loses taxes on income of about Rs.30-35 lakh crore, which comes to Rs.10 lakh crore. Last year the Government of India expected to collect Rs. 15 lakh crore as direct and indirect taxes. 

So demonetisation was a huge exercise, but what did the government achieve? The Reserve Bank of India (RBI) has reported that it has recovered Rs.29.84 crore worth of fake notes out of the currency it has taken back into the banking system. So this is just a case of the government not knowing what it was talking about. As for terrorism, the fact that money in the new Rs.2,000 notes was recovered from slain terrorists in Kashmir and other places speaks eloquently about the success of this foolhardy move. 

It is empirically evidenced that of the undeclared income each year, almost half is invested in property, and about 44-46 percent is equally invested in gold and jewellery and illicitly exported overseas, and just 4-6 percent is held in cash. People with excessive wealth seldom keep it in cash or they keep very little of it in cash. Only fools keep money idle. Money, white or black, is constantly put to work. The better connected send it abroad. 

According to Global Financial Integrity (GFI), India has exported an average of $46 billion each year for the past decade. This is from where the fabled Rs. 15 lakh for every Indian citizen was to have come from. In the past two years, not a cent has come back. The gold bond scheme has so far been mostly a flop and gold remained gold hanging on necks and buried in vaults. 

The prime minister’s “surgical strike” on black money has actually devastated the economy. Look at the scale of damage caused. India has a workforce of close to 450 million. Of this only 7 percent is in the organised sector. Out of this 31 million about 24 million are employed by the State or State-owned enterprises. Of this vast reservoir of over 415 million employed in the unorganised sector about half are engaged in the farm sector, another 10 percent each in construction, small-scale manufacture and retail. These are mostly daily wage workers and mostly earning less than the officially decreed minimum wages. At least 22 crore daily wage workers have suffered job loss. When you render such gigantic numbers jobless, you devastate the economy. 

Tens of lakhs of small farmers, particularly vegetable and fruit growers, have lost standing crops due to fall in demand. Small farmers are predicted to suffer a slowdown in growth from 20.6 percent to 8.8 percent of growth. This covers almost 70 percent of the farm sector. About two crore small retailers are also expected to suffer consequential losses due to a sudden fall in demand. 

Some facts are already in hand. Two-wheelers are the bellwether of the rural economy. The market grew 16 percent in April-October 2016 to 11.34 million. That growth fell 6 percent in November to 1.34 million and the industry expects it to fall by a huge 35 percent in December, the lowest level in six years. Clearly, the “surgical strike” was, in fact, a carpet-bombing of the economy.