The government and the Opposition on Tuesday tenaciously stuck to their stated positions on demonetisation, a year after the dramatic step to cancel Rs 1,000 and old Rs 500 notes was taken by the former as part of its project to rid the economy of its black component. In a Facebook post and later addressing the media at the BJP headquarters, finance minister Arun Jaitley firmly defended the November 8, 2016, announcement to demonetise 87% of the currency in circulation, saying it encouraged formalisation of the economy and improved tax compliance in great measure. Describing the note ban as “a watershed moment in the history of the Indian economy”, Jaitley said suspicious transactions of around Rs 1.6-1.7 lakh crore are now being probed, adding the tax administration and other enforcement agencies are using big data analytics to crack down on suspicious transactions. However, former prime minister Manmohan Singh led the Opposition attack, saying: “At a time when the economy has slowed down considerably, despite favourable global macroeconomic conditions, the fear of tax terrorism has eroded the confidence of businesses to invest.” While Singh had earlier estimated that the note ban would shave off 2% of the gross domestic product (GDP), many economists peg the figure at around 1% of GDP. According to Jaitley, the demonetisation exercise met the main intended objectives of trimming cash in the economy (cash in circulation is now is 10% below the level before the note ban while it would have otherwise been 10% higher than that level) and ending the anonymity of its holder, while providing invaluable data to mine from and crack down on shell companies along with other sources of black money.
While Jaitley saw merit in the very fact that currency in circulation is less by Rs 3.89 lakh crore, many analysts felt that per se might not be beneficial to the economy. Former chairman of the National Statistical Commission Pronab Sen pointed out this extra cash was indeed supporting the informal sector and in the absence of an increase in credit flow to them, unorganised sector players might continue to suffer. GDP growth came down from 7% in Q3FY17 to 6.1% in Q4FY17 and further to 5.7% in Q1FY18. While statisticians point out that when the informal economy is better represented the growth rates could be revised further downwards, the jury is still out on whether the note ban’s adverse effect on the economy has waned or if the economy has indeed bottomed out.
Citing “multiple benefits” of the note ban, the Prime Minister’s Office said banks have lowered their lending rates by about 1 percentage point after demonetisation; real estate prices declined; revenues of urban local bodies rose almost three times, as consumers were allowed to pay in digital mode; and the number of debit card transactions rose 50% in August from a year earlier, while the value of such transactions climbed 48% to `35,413 crore.
In a 1,843-word blog titled “A Year After Demonetisation”, Jaitley said: “In an overall analysis, it would not be wrong to say that country has moved on to a much cleaner, transparent and honest financial system.” Singh said the “twin blow” of demonetisation and the goods and services tax (GST) was a “complete disaster” for the economy and criticised the Modi government for not having learnt “any lessons” from what he described the “monumental blunder”.
Both the note ban and GST have sown a “deep-rooted fear of tax terrorism” among the business community and the growth in private investment is at a 25-year low, which is “terrible for India’s economy”, he said. Countering Singh, Jaitley said that while the note ban was an “ethical drive and moral step”, the “loot” happened under Singh in 2G, CWG and coal block allocation scams. CPI(M) general secretary Sitaram Yechury said: “What was the purpose of demonetisation? Modi kept changing goalposts but no aims have been achieved, except pushing economy into a tailspin.”
West Bengal chief minister Mamata Banerjee said: “Demonetisation is a big scam. It was not to combat black money. It was only to convert black money into white money for vested interests of political party in power (sic).”
Of the Rs 15.44 lakh crore worth of notes withdrawn from circulation, Rs 15.28 lakh crore had been deposited back as on June 30 this year. Jaitley said the currency in circulation is less by Rs 3.89 lakh crore now (it was worth Rs 17.77 lakh crore when the note ban was announced last year).
“With the return of Rs 15.28 lakh crore in the formal banking system, almost entire cash holding of the economy now has an address. It is no more anonymous,” Jaitley said.