No economic decision has so deeply divided the world’s largest democracy. Exactly a year ago, at 8pm on November 8, 2016 to be precise, India’s Prime Minister Narendra Modi dramatically announced on national television that the two highest-denominated currency notes in use would cease to be legal tender a few hours later, that is, with effect from midnight.
The efficacy and desirability of his decision to demonetise 86 percent of the currency in circulation, worth $242bn, that evening has polarised public opinion like never before in the world’s second-most populous country.
Supporters of the government of the Hindu, nationalist Bharatiya Janata Party (BJP) led by Modi argue that demonetisation has helped curb the use of black money (or money illegally obtained and not declared to the tax authorities) and increased the number of income tax assessees, in a country where barely five percent of its population of 1.3 billion pay income tax.
When Modi announced demonetisation, he claimed that not only would the use of black money be constrained but also that the move would curb the use of fake currency used by “terrorists”. He subsequently added that demonetisation would help usher in a more transparent, cashless or “less cash” economy.
The prime minister’s critics contend that these undoubtedly laudable objectives have not been achieved to any discernible degree.
On the contrary, the decision to demonetise has hurt the weakest sections of India’s notoriously unequal society, specifically daily-wage labourers, small traders and businesspersons, farmers, women and senior citizens.
They add that over the last twelve months, numerous jobs have been lost, livelihoods destroyed and the rate of growth of the economy has decelerated significantly – even if one goes by the government’s own statistics.
Instead of curbing illegal transactions, a former BJP minister, Arun Shourie, has gone to the extent of claiming that demonetisation was the “world’s largest money-laundering scheme”.
Demonetisation will certainly continue to be hotly debated for quite some time to come. Predictably, what is a 'black day' for the political opposition is being celebrated as 'anti-black money day' by the ruling party
Modi’s ministers and government spokespersons, however, say there has been an 18 percent rise in income tax returns over the last year after demonetisation, that the authorities are investigating large volumes of allegedly illegal cash transactions and that the registrations of a few hundred thousand shell companies have been cancelled.
Further, it is said that demonetisation is part of a series of structural reforms of the Indian economy that will yield dividends in the long term, even if the decision has resulted in pain and disruption in the short run.
The former Attorney General Mukul Rohatgi had told the Supreme Court soon after demonetisation that a hefty proportion, or around one-fifth, of the banned currency notes – 1,000 ($15.45) and 500 ($7.73) rupees – were not expected to be returned to the system. This was expected to bring about windfall gains to the public exchequer.
Ten months after demonetisation, the country’s central bank and apex monetary authority, the Reserve Bank of India, has formally acknowledged that nearly 99 percent of the banned currency notes had been returned.
It was also conceded that the proportion of fake currency notes, at 0.008 percent of the total currency in circulation, has hardly abated. Fake 2,000 rupee ($30.90) notes that had been recently introduced were found. There were disputes about whether incidents of terror violence had come down at all on account of demonetisation.
After a temporary surge in cashless transactions, it appears to be business as usual in India’s largely cash-based economy.
The informal sector of the economy, where cash transactions are largely prevalent, accounts for some 40 percent of the country’s gross domestic product (GDP) and 90 percent of employment. One of the biggest beneficiaries of demonetisation has been Paytm, an electronic payments brand, which is associated with China’s Alibaba group headed by Jack Ma.
Some of the government’s sympathisers agreed that demonetisation could have been better planned and implemented more smoothly, thereby preventing large queues from forming outside bank branches and automated teller machines between November 8 and December 31 last year.
Still, they point out that there was no major disruption of law and order during the period, no riots or looting on the streets. Moreover, the element of surprise was crucial for the success of demonetisation and, hence, the widespread disruption of economic life.
Former Indian Prime Minister Manmohan Singh – whose government is frequently accused by Modi and the BJP of having turned a blind eye towards large-scale corruption during the decade it was in power between 2004 and 2014 – described the demonetisation decision as “organised loot and legalised plunder”.
His prognostication that GDP growth rate would come down by around two percent seems to have been borne out by official statistics. The growth rate declined to 5.7 percent in the first quarter of this year, compared with 7 percent in the third quarter of last year.
Those sympathetic to the incumbent regime point to the fact that the BJP won over 80 percent of the seats in the March elections to the legislative assembly of Uttar Pradesh (the country’s most populous province where one out of six Indians reside). In other words, they argue that demonetisation did not dent the prime minister’s popularity, since the poor voted in large numbers in his favour.
The BJP’s rivals contend that the electoral outcome in the state of Uttar Pradesh was influenced by non-economic factors. They say that the full effect of demonetisation was at that time not fully felt by sections of the poor, who perceived the move as against the interests of the rich and the corrupt, especially those in political parties that had dominated the state.
Demonetisation will certainly continue to be hotly debated for quite some time to come. Predictably, what is a “black day” for the political opposition is being celebrated as an “anti-black money day” by the ruling party.