A critical, witty look at the impact of demonetisation in India and the aftermath of that landmark economic decision, three years down the lane, by Ramon Dharma Rajan.
In The Conjuring, the clocks in the house froze at 3:07 am, indicating the presence of a demonic entity. Three years and seven days ago, an evil spirit was let loose upon our nation. And that spectre haunts us still!
November 8th, 2016 was one of the most beautiful evenings of my life. I had crossed the Tungabhadra River to reach Anegundi and watch the sunset from Anjaneya Hill. The hill didn’t have as many footfalls as the other more popular tourist destinations in Karnataka. Most tourists enjoyed the evening breeze as the sun dipped down from the clouds to hide behind the hills. No one was in a hurry to click a selfie. Someone even pulled out a guitar and began to sing. This was no mere sensory pleasure that leaves one thirsting for more—it was the kind of spiritual bliss that leaves one content and warm. I began my walk down the hill even before the sun had set, and yet, by the time I reached the river, it was already dark. I crossed the river under the light of a beautiful half-moon and enjoyed dinner at Hampi in the company of a Slovenian couple I was acquainted with.
The next morning, I was settling the payment for my homestay—the bill had come up to ₹500. I swished a single note suavely at the owner and to my shock, the note was flung at my face.
“Sorry, I cannot accept this.”
“Why not? What happened?” I responded, dumbstruck. In my defense, there was no network where I stayed and I was indeed clueless about the happenings of the previous day.
“Narendra Modi made some announcement. ₹500 and ₹1000 notes cannot be transacted or something. Counterfeits and black money and all...” he replied, sounding just as clueless, despite having seen the news.
“Well, the nearest ATM is at Hospet, which is half an hour from here. It is not possible to go there and come back with ₹100 notes. So will you accept this or not?”. The house owner reluctantly accepted the ₹500 currency note. The guy at the restaurant I went to, was much kinder! He accepted my ₹1,000 note—no questions asked, and gave me change! Even the travel agent who booked my bus ticket to Trivandrum via Bangalore did not mind. In fact, the only other person who refused to accept a ₹500 note that day was the auto driver at Bangalore, but he changed my notes easily at a petrol pump.
But of course, the rest of the country did not have it as easy as I did. In most Indian cities, the Government decision was taken very seriously by people such as the auto driver I had encountered. Life came to a standstill in front of ATMs, which were left reeling under the rush to withdraw money in the right denominations!
On November 8th, 2016, the Prime Minister of India made an explosive announcement—all currency notes of ₹500 and ₹1,000 will no longer be considered legal tender. This volcanic eruption flung lava in three different spheres of life—the economy, politics and society.
The economics of the decision, prima facie, was brilliant. The volume of currency in circulation at that point in time amounted to ₹14 lakh crore, of which approximately ₹3 lakh crore was estimated to be unaccounted in nature. Within 50 days, every person would have to exchange their demonetised currency for new notes with the bank. People holding unaccounted money would be caught red-handed! And if the unaccounted money was not exchanged, the RBI would be able to write off ₹3 lakh crore from its liability (Every currency note we hold is basically value owed by the RBI to the holder). The profit created by this reduction in liability could be transferred to the Government, which in turn, could use this fund for development.
Of course, the crooks hiding their wealth under their beds would still find a way to convert the colour of their notes. However, even then, the Government hoped to seize at least one-third of the black money in circulation, resulting in a minimum gain of ₹1 lakh crore. To put things into perspective, the total budget of the Kochi Metro is around ₹5,000 crores and the total budget of the Vizhinjam Port is around ₹7,500 crores. The Government could build eight such projects if at least one-third of the estimated unaccounted currency wasn’t converted at banks. A huge win!
But this plan fell flat on its face. 99.3 per cent of the currency was returned to the banks. Only ₹10,000 crores of the demonetised currency did not return to the Banking system. Yes, it was still a win, but did it justify the cost incurred over this exercise? According to a report by the Economic Times, just the cost of printing new currency denominations went up by ₹8,000 crores due to Demonetisation!
Demonetisation was announced along with an Income Declaration Scheme, which allowed people to disclose their unaccounted income and pay a reduced penalty. Also, the exercise of demonetisation itself generated a wealth of data that could help Income Tax officials track black money. But who would take the responsibility of studying this data? The Income Tax Department assesses just about three per cent of the returns filed every year. In the face of Demonetisation and the Income Declaration Scheme, the department had a wonderful opportunity to take up several cases for hearing, but as is quite evident, they did not have enough manpower for the same (which remains the case till date). Even the cases that are taken up for hearing, take years at length to finalise! Quite often, the cases are dragged all the way to the Supreme Court, resulting in decades of delay before the case is finalised. It might sound fancy and even look heroic to see IT officials raiding business premises and seizing gold biscuits from behind walls, but how much raiding will they be able to do?
What is the reason for this failure—the first of many due to Demonetisation? Did the Government of India, with all its data, intelligence and bureaucratic machinery eventually take its decision based on Rajnikanth’s movie Sivaji: The Boss?
A couple of months into DeMon, the Government realised that their idea of recovering black money by writing off the liability to the RBI might not work, as the majority of the currency had been returned to the banks. So they shifted their goalpost to a more reasonable position. The objective all along had been to eliminate the cash economy and bring all transactions into the formal sector. A noble thought, but this objective became a bone of contention for me, and I have three arguments against the same.
Firstly, it must be noted that the average literacy rate in India is less than 70 per cent, that is, over 30 crore people in our country cannot read or write. Going one step further, we must note that Internet penetration in India is around 30 per cent, peaking at 50 per cent in Kerala and dipping at 20 per cent in Bihar. While the urban middle class takes Debit cards and Internet Banking for granted, and lauds the Government for moving towards a cashless economy, the implementation of the same in rural India seems like quite the impossible feat! The havoc that followed in rural India post-demonetisation is anybody’s guess! How did the Government expect illiterate citizens—who form a massive part of the population—to switch to Internet Banking? While every village may claim to have access to electricity, is this available 24x7? If not, how will Debit cards work? If you don’t have a mobile phone, how will you generate an OTP—a basic requirement for any Internet Banking Transaction? Pulling cash out of the system was akin to pulling the plug on a patient already reeling on ventilator! The agricultural distress that the majority of rural India was reeling under became the ventilator in this case.
Secondly, as an entrepreneur, moving towards the formal economy is not something that excites me. Hear me out, as I am about to tread on some ethically grey areas. Every citizen must follow the law of the land. But the system has sharks that could eat me up! Pushing micro and small enterprises into the formal sector puts them in direct conflict with corporate giants. An enterprise making a turnover of ₹2 crores is bound by the same system that binds another multinational company making ₹2,000 crores. While the little guy scrambles to get credit at a reasonable rate, the big fish is flush with funds. The only option that small business firms have is to stay out of the system, unless the Government develops a system that protects the business interests of smaller entities. Pulling cash out of the system will only starve small businesses. It will not magically generate taxes.
Thirdly, the growth of online payment gateways, which I myself have become dependent on, is a cause of worry. As data takes the place of oil in the 21st century, it is pertinent to ask, “Where does all the data go? Who controls the Data?” I received a coupon of ₹51 when I installed Google Pay. I also received ₹51 for every invitee of mine who installed the app. Google Pay also gave out prizes during Diwali. This worries me because as a financial expert, I know that upon every cost I incur, there will be a profit margin earned by the business. One begs to ask that if ₹51 is the cost incurred to Google Pay, what is the profit they make? Why do payment banks offer 7 per cent interest on Savings Accounts while traditional banks can only afford 3.5 per cent? What is their profit in this transaction? Let’s not forget, that the bank profit is nothing but my cost! What else do they get with every transaction? My data, that’s all, right? What could they possibly do with data on the type of products I purchase?
How much data can be mined out of my online transactions?
Can the Government view this data?
Can a Foreign Government view this data?
Is the data available for sale?
Studies suggest Facebook knows more about me than my own girlfriend. Unlike Facebook, however, my girlfriend has no trouble in convincing me to do anything she wants! What about Face—wait, an FB notification just popped up... oh, someone tagged me in a pic... it looks nice... oh, Reebok has a sale of trek shoes, my old pair tore last week, I was thinking of getting it stitched... Wait! The ad has a tagline that says, “Don’t fix your old shoes!” Strange... I’ll place an order anyway—now, where was I?
In the weeks that followed DeMon, our former Prime Minister, Dr Manmohan Singh had predicted that this exercise would create a 2 per cent dip in GDP growth. And today, our economy is at a decade low. The automobile sector is down, the IT sector is down, Industrial output is falling, jobs are lost and farmers are in distress. This crisis is not due to a global slowdown, as a matter of fact, the US-China trade war has opened up a wealth of opportunities for the Indian economy. Yet, our inability to capitalise on it reflects the crippling effect of Demonetisation!
The decision of Demonetisation received widespread adulation as a singlehanded master-stroke—a surgical strike on black money. This dopamine rush awarded to the Indian Government by its citizens, lauding Demonetisation, has given it the impetus to go ahead with other decisions in the same manner. Not having extensive consultation, or defying logic is perceived as a heroic move in itself. After all, that’s what the hero does in every Bollywood climax, is it not? Go against the advice of every sane mind in the room, run with his instincts and come out victorious. Sadly, the reality is just not that dramatic and very often, logic triumphs. Our masala-coated minds may have trouble digesting that statement, but it’s true. And when the lives of 1.3 billion people are at stake, I think it is best to go the logical way. The Prime Minister’s speech 3 years and 7 days back had a Batman level of theatricality—and it left us scurrying like jokers.
This isn’t the first time that demonetisation has happened in the world. A quick look at the history of Myanmar will reveal the tyranny of a dictator. And the most glaring example of that tyranny was the three rounds of demonetisation that took place within two decades. The objectives that DeMon aimed for, could have been achieved through more efficient and less radical routes. Routes that would not have created structural weaknesses or a demand recession in our economy. Fixing this mess will take more than the swish of the pen that created it.
The author is a leading finance and economic professional. All views expressed in this article are personal.