The five-judge bench of the Supreme Court, headed by Justice SA Nazeer, on Monday held the much-debated decision of demonetisation, taken by the Central government on November 8, 2016, constitutionally valid, albeit with some disagreement within.
The bench, comprising Justices BR Gavai, BV Nagarathna, AS Bopanna and V Ramasubramanian, dismissed a bunch of petitions challenging the decision by a 4:1 majority, observing that the government notification was valid and satisfied the test of proportionality. The court observed that notification announcing the decision to scrap Rs 500 and Rs 1,000 notes was not unreasonable and could not be negated on the ground of decision-making process.
The only voice of disagreement was that of Justice Nagarathna who observed that “Parliament should have discussed the law on demonetisation, the process should not have been done through a gazette notification. Parliament cannot be left aloof on an issue of such critical importance for the country.”
Much like that disagreement, opinions and observations on the impact of the decision differ over a wide spectrum. Till date, demonetisation remains probably the most debated policy decision that the Narendra Modi-led Bharatiya Janata Party (BJP) government took.
“The point of the petitions was whether the procedures were followed (in announcing demonetisation). The dissenting judgment says that procedure was not followed. It says that it wasn’t the RBI that recommended the move but it came from the government. The process was hurried meaning there wasn’t any deliberation that took place. RBI’s own minutes of the meeting show that they were not convinced that the move would have any impact on India’s black economy,” says Arun Kumar, professor at the Institute of Social Sciences.
Reality versus Promised
Following the Supreme Court’s verdict, Congress MP Jairam Ramesh said in a statement that the verdict “has nothing to say on whether the stated objectives of demonetisation were met or not”.
Circulation of fake notes continued. Demonetisation of Rs 500 and Rs 1,000 notes was announced as a measure directed to hit at the high-denomination fake currency circulation in the economy. Official figures show that fake notes did not disappear from India post-demonetisation.
An RBI annual report that was released in May last year found that fake currency detection grew 10.7 per cent in the financial year ending March 2022. As per RBI’s data, there was a 101.93 per cent increase in counterfeit notes in the Rs 500 denomination and a 54 per cent jump in counterfeit notes of Rs 2,000. In 2016, the year of demonetisation, around 6.32 lakh fake notes were seized across the country. In the four years after that, fake notes totaling 18.87 lakh in various denominations were seized.
Digital transactions became the norm. Demonetisation immediately forced the entire economy to move into digital transactions due to an acute shortage of cash. The maximum brunt was borne by the micro, small, medium enterprises (MSMEs) of India.
Sharp fall in real GDP growth followed the decision, dealing a shock to the Indian economy and affecting its growth rate. While the growth rate was partially higher in the following quarter or two due to low base effects, quarterly real GDP growth fell from the 9 per cent levels seen in FY17 and FY18 to 3 per cent in the last quarter of FY20.
MSMEs bore the biggest brunt of demonetisation. About 97 per cent of MSMEs operate in the informal space in India. Rendering the biggest denominations invalid sucked the liquidity out and struck a huge blow on these small enterprises. A report published by the RBI in 2018 found that the contribution of MSMEs to India’s total gross domestic product (GDP) was about 30 per cent; 45 per cent of India’s manufacturing output came from MSMEs. The sector also contributed about 40 per cent to India’s total exports. The report further observed that the share of informal sector in the total output of MSMEs is an estimated 34 per cent.
“The MSME sector has witnessed two major recent shocks, viz., demonetisation and introduction of goods and services tax (GST). The introduction of GST led to increase in compliance costs and other operating costs for MSMEs as most of them were brought into the tax net," the RBI report said.
Formalisation of Economy
Demonetisation was a move to achieve greater formalisation of the economy. After 2016 and along with the implementation of the GST in 2017, a larger part of the informal economy was brought into the formal fold. Various newer forms of digital payments, like Unified Payments Interface, became the go-to mode of transaction. Greater formalisation not only meant a larger policy push towards digital transactions, but also aimed at bringing a huge chunk of business, that had till then managed to escape the taxman’s lens, under the taxation ambit.
“Demonetisation was an important step towards addressing a couple of issues, like bringing about a rise in the size of formal economy. Formal economy leads to a larger tax-GDP ratio. The question now is whether 2016 onwards it has led to larger formalisation, which is difficult to estimate in the short run,” says NR Bhanumurthy, vice chancellor of BR Ambedkar School of Economics University, Bengaluru.
“Something like GST is also taking its time to deliver the kinds of returns expected out of it. But the point that formalisation has increased since demonetisation is supported by Periodic Labour Force Survey (PLFS) data that shows formal sector jobs have gone up,” Bhanumurthy adds.
Demonetisation began the process of officially formalising the economy, resulting in increased digitisation in the following years and the birth of the gig economy at a pace faster than that of other countries. The PLFS data up to March 2021 shows that there was a “significant acceleration in formalisation of the job market, driven
by both new formal jobs and formalisation of existing jobs, during 2021, with 13.95 lakh net addition to EPF subscribers in November 2021”.
A State Bank of India (SBI) report published in October 2021 found that the share of informal economy in FY18 might have shrunk to approximately 20 per cent from 52 per cent.
“A sizeable informal economy is not just the issue of emerging and developing economies. For example, as per IMF, even in Europe informal economy is estimated at 20 per cent of GDP. For India, post 2016 plethora of measures which accelerated digitisation of the economy, emergence of gig economy have facilitated higher formalisation of the Indian economy at rates possibly much higher than most other nations,” the SBI report found.
The report says that as per provident fund payroll data, roughly 36.6 lakh jobs had been formalised till August 2021. “Next is the E-Shram portal, which is the first-ever national database of unorganised workers. 5.3 crore unorganised workers (Oct 27/ and counting) have registered in the first two months after its launch, with 62 per cent of workers belonging to the age-group of 18-40 years and 92.0 per cent registered workers having monthly income of less than Rs 10,000,” the report observed.
While the jury is still be out on whether demonetisation has achieved what it set out to initially, the Supreme Court verdict does give weight to the government’s policy stand that a large portion of the Indian economy needed to be brought under the ambit of formalisation.
