Last year’s demonetisation is undoubtedly the most irrational economic decision taken in post-Independence India. There have been decisions in the past that have been objectionable; but this announcement on November 8, 2016, simply defied reason. Not surprising, thus, that the government’s subsequent defence has kept changing over time to camouflage the irrationality of the proclamation made at four hours’ notice nullifying 86 per cent of the country’s currency.
The original argument was that demonetisation will attack black money, since its operators would not dare to come to banks to deposit or exchange old notes for fear of awkward questions. Rs 3.5 lakh-crore being immobilised in this manner was bandied about, which, it was argued, would deal a crippling blow to the black economy. Talk even centred around how this money, being a windfall for the Reserve Bank of India and hence for the government, should be distributed among the people. Against this, it was pointed out even then that such an immobilisation of a stock of money would not much affect the flow of black activities; and that black economy operators were resourceful enough to ensure that immobilisation on this scale would not occur.
Now, the RBI has admitted finally that only about 1 per cent of the demonetised currency has not returned to the banking system. Since much of even this small amount (around Rs 15,000 crore) does not belong to the black economy, demonetisation as a way of attacking this economy has clearly been, by the government’s own criterion, a miserable failure. The government, however, has now made an about-turn, arguing that the return of currency, as opposed to its non-return, is the success of demonetisation, since it has “flushed out” all this money from the black economy. How such ‘flush-out’ can curb black activities remains unclear.
Pro-government economists are taking a different track. They are citing the number of cases that have got opened for inquiry, because of the largeness of the amounts brought to the banking system, as the success of demonetisation. They can merrily do so for the next half century, as the inquiries, if at all they get pursued, run their ponderous course!
Besides, if making inquiries alone was the objective, then one did not need a draconian measure like demonetisation. It dealt a severe blow to the informal sector where 85 per cent of the country’s workforce is employed; it caused massive suffering to people, and it led to many deaths.
Two other objectives were cited by the government at that time. One was to remove counterfeit currency and the other was to promote a cashless economy. The counterfeit currency argument was absurd. The magnitude of such currency was estimated even then by the Indian Statistical Institute to be no more than .0025 percent of total currency. To demonetise 86 per cent of the total currency only to get rid of such notes was like using a bulldozer to kill a worm.
Besides, getting rid of such notes could have been done over a period of time; it didn’t require any sudden demonetisation. And even here it turns out that the amount of counterfeit currency actually detected after demonetisation is no more than around 5 percent of the ISI estimate.
As for the cashlessness argument, it was an immoral one to start with. Cash transactions are costless while cashless transactions involve a cost in the form of charges by financial intermediaries. Forcing people into cashless transactions was tantamount therefore to boosting the profits of certain financial companies, the intermediaries managing such transactions, at the expense of the common people. It was a daylight robbery committed by the State on their behalf. As remonetisation has occurred, not only has activity revived to a certain extent, but people have also gone back to cash transactions even where they had been forced into non-cash modes earlier.
There is now a tendency to claim that with remonetisation occurring, whatever ill-effects attended demonetisation have only been transitory. Even if this argument is accepted, it does not excuse demonetisation itself. The fact that a person recovers from a wound does not excuse wounding him.
It takes time however for business to recover: even if remonetisation becomes complete, there would still be certain residual irreversible effects of demonetisation. But with the goods and services tax dealing a further blow to the economy, we now have an identification problem: where do the effects of one blow end and those of another begin?
(The writer is a Marxist economist.)