The great Demonetisation botch-up

The RBI’s report on demonetisation is a damning critique of the government’s decision and shows how it had no clue about the move’s implications or how bad it will hurt the economy

On November 8, 2016, when Prime Minister Narendra Modi announced the scrapping of high denomination notes that sustained 86 percent of country’s economy, there was disbelief and bewilderment amongst economists and bankers as to why such a decision that defied common sense was taken. Initial explanation for this drastic decision proffered by the government was that extinguishing higher denomination notes would fight the scourge of black money, fake currency and help in digitising the economy. The long-drawn counting of those notes drew to a close last week and the Reserve Bank of India (RBI) revealed in its annual report that the government not only had no clue about the implications of demonetisation, but they also did not have any idea how badly the economy would be hurt.

Now it is not just visible in figures, but also in real life. The economy that was cruising at 7.5 percent growth rate has sunk to 5.6 percent, which means a precipitous fall of Rs 3 lakh crores. It is anyone’s guess what that means in terms of job losses and bust businesses. A few months ago, a body that monitors Indian economy (Centre for Monitoring Indian Economy) claimed that over 1.5 million people lost their employment in the first quarter of this year. It is not clear whether CMIE factored in the informal economy that is entirely cash based, but this move resulted in a reverse migration to the villages as the cities suddenly lost any allure for a job seeker. Worse all those who returned to their villages never got any call from their employers as the economy has just not revived if the latest figures are anything to go by. Many economists are of the view that the growth rate is perhaps less than what the Central Statistical Organisation (CSO) is claiming because every indicator shows new lows whether they are in credit growth, private sector investment or manufacturing. “These figures do not add up to even 5.6 percent growth,” claim many informed voices. In 2014, the government had changed the series for tabulating the GDP numbers to 2014 as the base year. At the face of it, it had helped in showing a jump in growth rate, but when the new standard shows such a rapid decline, experts are not willing to hazard a guess as to how much it will be if it is calculated on the earlier series.

The growth has also been impacted by the imposition of Goods and Sales Tax (GST) that was imposed by the government on July 1. This tax has sent the economy into a tizzy. Small businesses are weighed down by new demands and the threat of inspectors knocking on their doors. Besides avoidable confusion about multiple tax rates, businesses have been saddled with unnecessary paper work. It may one day all settle down, but the pain of transition is wrecking livelihoods.

However, horrific is the manner in which demonetisation was unleashed on an unsuspecting country that trusted its leader, Narendra Modi, to take all the right decisions in their favour. About 200 people died standing in long queues. There were countless tragedies—postponement of marriages, as people did not have money or jobs, the inability of people to get treatment, failure to pay fees and most importantly the inability of cooperative banks to dispense cash to small businesses in states like Kerala and Maharashtra. The problem has not yet been sorted out as the government has introduced so many riders in the name of controlling black money that legitimate funds are still jammed in many banks.

The biggest embarrassment for the government was when it claimed that more than 99 percent of the cash had been deposited. The Centre was working on the assumption that there would be so much unaccounted funds that will not be deposited in the banks. Later, they hoped to get a higher dividend from the RBI to fund their development programme. But just the opposite happened. The RBI has given a dividend which is almost half of what they gave last year.

Prime Minister Modi sought to gain legitimacy for his bizarre decision by claiming that note ban would help in controlling terror and instability in Kashmir. This was based on the spurious assumption that the protestors and stone-pelters in the troubled state of Kashmir are paid to demonstrate and if the money tap is turned off, then everything would be fine. Figures indicate that not just the protests spiked, but terror killings too jumped in the state.

Similarly, demonetisation was used as an instrument for fighting fake or counterfeit currency. Indian intelligence agencies and political parties—both Congress and BJP—had been claiming that Pakistan intelligence agencies had set up note printing machines and were trying to subvert the Indian economy. Many specialists profoundly stated that fake currency in the economy could be as high as Rs 40,000 crores (4.6 trillion dollars) if not more. Interestingly, the RBI in its gargantuan exercise found a niggardly Rs 41 crore worth of counterfeit notes. Sources in the government claim that it was well known that fake notes would not account for much, but the government continued to peddle the fiction it had created to bring in expensive security features and new currency printing machines.

This botched demonetisation decision, probably advised to the PM by some faux economists, has caused grave anxiety in the ruling party. Though the BJP had won the crucial election to Uttar Pradesh, they were the only party that had cash as its opponents were in dire straits. The mood seems sombre since then. Recent by-polls show that their support is waning rapidly. Their candidate from Goa scraped through by a measly 4,500 votes and the BJP lost an election from capital Delhi. The fear in the party is that they could be on a downslide if the government does not do something urgently. Recently, party president Amit Shah was pushed into a corner by party MPs who wanted to tell him how the decision has hurt them on the ground.

There is a view in the government that time will sort out these problems and growth will climb again. However, this seems unlikely as problems of the economy are systemic and there are no economic indicators that inspire hope. India’s confrontation with China and the manner in which it is enlarging itself in the neighbourhood does not really help its cause.