Since 99% of demonetised currency is back with the banks, the government faces a difficult question, if the move was at all worth? To answer that, we have to revisit the objectives set and critically analyse the effects of demonetisation policy. The government’s articulation of demonetisation listed the following objectives:
• To evict the fake currency notes of Rs 1,000 and Rs 500;
• To get rid of black wealth held in cash;
• To bring back all the money to banking accounting;
• To identify undisclosed income through income tax (IT) raids;
• To use the opportunity to promote digital payments.
Against these targets, only 7.62 lakh pieces of fake currency notes worth Rs 41 crore had returned to the banking system and Rs 16,000 crore (1% of Rs 15.44 lakh crore of demonetised currency) did not come to the banks. This ruled out any significant special dividend to the government and RBI, as was anticipated. As a positive consequence of demonetisation, the tax authorities discovered an undisclosed income of Rs 17,526 crore and seized Rs 1,003 crore through searches and surveys so far. This number, however, is not impressive compared to the identification of undisclosed income and seizure of gold and cash during the pre-demonetisation years. For example, in 2011-12, Rs 906 crore worth of cash and jewellery was seized and Rs 10,649 crore of undisclosed income identified. This can reasonably be projected to a possibility of what has been achieved in the year 2016-17, that is Rs 1,003 crore of cash and gold seizure and a detection of Rs 17,526 crore of undisclosed income.
The Pradhan Mantri Garib Kalyan Yojana (PMGKY), which provided an opportunity to unaccounted cash holders to come clean, too did not produce results as anticipated. Only Rs2,300 crore was collected against the IT department’s target of Rs1 lakh crore. Together, all these direct monetary benefits accrued from demonetisation accumulate to about Rs 35,000 crore only.
Although demonetisation has successfully mobilised all the money, including that of small savers such as housewives, traders and businessmen, into the banking system, these funds with banks are expected to be used for productive purposes by lending at cheaper rates of interest. Most of these funds, however, were short-term savings and were expected to be withdrawn quickly rather than of any use for long-term lending purposes by banks. The black money holders laundered money into deposits up to the limit of Rs 2.5 lakh in several bank accounts—either relatives or otherwise—and such deposits too were expected to be dried-up quickly.
The Economic Survey estimated that demonetisation added 5.4 lakh new taxpayers in the financial year 2016-17. However, the average income quoted by these new taxpayers is Rs 2.7 lakh, which would mean they were required to pay tax for an income of Rs 20,000 only, as income up to Rs 2.5 lakh is granted exemption. Also, most these new taxpayers may not continue to stay in the tax-net, as next year they are not required to deposit whole of their cash collected or accumulated through the year.
Demonetisation came as a big bonanza for digital payment platforms. In terms of total volume of digital transactions from all service providers, it rose from 671 million in November 2016 to 957 million in December 2016, but dropped to 862 million in July 2017. In terms of value, the transactions spiked to Rs 1,044,055 billion in December 2016, but dropped to the pre-demonetisation levels of `107,481 billion in July 2017.
Thus, if the slowdown in the economy post-demonetisation by 1-2% of GDP growth rate constituting a loss of income of Rs 1-2 lakh crore, plus the new currency printing (Rs 7,965 crore) and transportation (Rs 16,000 crore as on December 6, 2016) costs, caused inconvenience and loss of lives, etc, are considered, then demonetisation, as an economic case, does not stand the scrutiny. Clearly, the costs outweighed the benefits. Expected long-term benefits such as growth in tax revenue, digitisation and decrease in corruption are not convincing or foreseen now, as much as the dreams sold by the experts and the government in the beginning. What needs to be done to curtail black money is to fix the demand for black money that comes from political parties, real-estate business, government-private sector nexus, rather than stressing too much on to curtail the supply of black money through cash-less measures.
Associate Professor of Economics, FORE School of Management, Delhi