Ever since the RBI released its Annual report 2 weeks ago, Demonitisation (DeMo) is back in the news. And with its eminent Ex-Governor Raghuram Rajan now in India to promote his book, DeMo continues to hog the headlines and Op-Ed pages. The analysis of DeMo swing from scathing criticism of being a “big mistake” by the likes of Ex-Economic Advisor Kaushik Basu to calling it a “huge success and a course correction” by the likes of Gurumurthy, the veteran commentator on public affairs. So, as it happens in most issues these days, “for every spin there is an equally effective and opposite counter spin”! And where you stand on an issue depends on where you stand on the ideological divide. On social media, it was a hashtag war between #DeMomenisationsuccess and #DeMonetisationfailure!
Ten months on, based on all the data available (99% of DeMo notes coming back to the banks) it seems that DeMo has not helped in sucking out the black money. In retrospection, I wonder how the government expected anybody in India to give up their prized possession (currency notes in this context) at all in the first place. In my own experience, when coming out with marketing promotion programs for the trade, we usually take twice the time for foolproofing the program compared to conceiving the program itself. This is from the wisdom of previous programs over the years where, we found that the Indian brain works over time always to find loop holes/gaps in any program announced. So, in a sales promotion program for example the trade will end up earning the incentives while you never achieve the increased sales objectives!
This is what happened in DeMo as well. If you remember, the day DeMo was announced, the chattering class’ verdict on WhatsApp group and dining area discussions was that it was a “Master stroke”! While the middle class and upper middle class folks who didn’t have unaccounted cash had to just find ways of beating the lines to exchange their notes, the ones who had, started cranking their brains. The result was the everyday tweaking of the rules and adding more terms and conditions for currency conversion. The then Economic Affairs Secretary Saktikanda Das became a celebrity overnight, thanks to his daily media briefings on what else – change in rules!
By now, it is clear that notwithstanding the anti-DeMo commentary of economists, there was overarching, tacit support for the DeMo move from common public. Inspite of loss of business for traders, loss of jobs for casual workers and loss of income for farmers the Note Bandi didn’t evoke much unfavourable mood towards the BJP so far. I am not sure if it will, from now on. What explains this paradox?
Many of the commentators have alluded to the human trait of Schadenfreude to explain this. That the poor were happy because this was one move which affected the rich and privileged and that the Prime Minister Modi had the guts to do so. This is a good possibility. But there could be more to this as well. Within days of the DeMo announcement, the initial despair among people who were caught unawares with a lot of unaccounted cash turned into a relief, when they found ways and means to deposit the same into the bank. Among many ingenious ways, one was to tap into their own staff and workers to distribute the cash and get them deposited into their bank accounts. A report said that by Dec, the deposits in Jan Dhan Accounts peaked to Rs.74,609 crore! As of Sep, it was just 4,273 crore! The number of Jan Dhan accounts itself went up 5 times in this period! My guess is that, in this process of conversion through the conduit of using others’ accounts, there must have been a cost. The government must have lost an opportunity to earn taxes on the unaccounted income but those who had a lot of unaccounted cash ended up incurring a “conversion tax”! And I am certain that those who were witness to the rich incurring this tax felt certainly happy that DeMo was an equalizer of sorts. And not just being a witness, there would have been many who would have benefited from the sudden largesse of their masters as well and got their share of the “conversion tax”. So, instead of the government collecting taxes from the haves and distributing to have-nots by way of welfare measures did DeMo make it as a Direct Benefit transfer from the rich to the poor without the government in between? Probably.
It’s evident now that the DeMo move has been a rocking political success for the government. On the economic front, though the objective of sucking up the black money has not been achieved directly, certain fringe benefits have accrued. Like reduction in cash circulation, increase in Digital transactions, and increase in bank deposits,… These may leave the country in good stead in the future. In the short-term however, the country skipped its GDP beat.
So when one does the after”math” of DeMo, it may well be like the popular “Elephant and the Blind men” story. For some, it’s a failure. For some, it’s a success. For some, it’s a partial success and for some it could be a partial failure. I would like to go with Rajan’s assessment that the short-term economic losses far outweighed the long-term benefits. In hindsight, one is always wise. Other times – otherwise!
10 thoughts on “Demonetisation and it’s after”math”!!!”
Fairly balanced view.One additional benefit is that this has indirectly now made all future transactions more transparent n clearly traceable with Aadhar linking being the bridge.It would make future Governments enjoy taxing to fund their grandiose plans
Adv V S Lakshmanan
Thank you Sir for the feedback
Good one Anand… But even you are not able to categorically say YES or a NO
I’ve said that looking at the short term costs, DeMo was a failure.
Whilst the advanced economies are dealing with bitcoins and blocked chains and crypto-currencies we still have to deal with NaMo’s DeMo! I liked the reference to Schadenfrude, giving me something new to google about.
Ha Ha! Thanks for reading and for the comment!!!
Anand, You narrative style makes nice reading- now time to shift gears up by choosing topics which add weight to your writing carefully. DeMo, Dera are not topics that are worthy of blogging now…they present the topics which has been over presented by all. On the other hand, Topics like Making of Superstar 2.0, Fake news etc, 144 Character Governance are much better choices
Rajamouli could have chosen to make a boring Slumdog or a fantasy Baahubali- the choice of Baahubali as a film narrative was the first step to his momentous success.Trust you may factor this into your future blogs
Thanks Jayant for the feedback! I just write on topics which come to my mind that Sunday. I do consciously try to bring in my own perspective. Yes, your feedback is taken – will try to avoid topics which are already beaten to death.
Very good read. If the short term losses is going to outweigh the long term benefits or not is too soon to comment on.
Thanks Chirag for reading and for the feedback. Atleast it is clear for now that in the short term it has hurt the economy.