Whenever any economic programme is launched, it is hard to conjecture what the outcome would be and hence setting benchmarks for evaluation becomes challenging. It may be recollected that it was largely felt by industry that investment was thwarted due to the controversies regarding irregularities relating to natural resources and the difficulties involved in doing business during the UPA regime. As these issues were addressed and the score on the World Bank Doing Business scale became better, there was reason to be happy. But investment in the country keeps declining continuously. In retrospect, it does appear that these impediments were not really keeping investment back, howsoever inefficient they might have been.
It is the same when it comes to demonetisation. There are no clear answers as to whether or not it was successful as no performance parameters were set to evaluate the same. Ideally, the targets should be set in realistic terms, just like how a five-year plan talks of ballpark futuristic achievements in terms of growth or capital formation etc. Corporate strategies always quantify the revenue goals when any new product or system is introduced. But this does not happen when such macro schemes are introduced as it is hard to separate the extraneous factors.
In fact, the goalposts were not just changed regularly but were nebulous most of the time and open to interpretation. Keeping emotions aside (which is often raised by those opposing the move by relating the turmoil faced by individuals), one can say that demonetisation was a mixed bag—while the basic objective was probably not met, there have been some positive consequences that could be helpful in the future. While such a statement could be termed ‘fence sitting’, it will be useful to put forth the arguments on both sides.
First, the darker side of the argument may be expanded. When demonetisation was introduced, it was argued that the main objectives were to get in black money, counter terror funding and eliminate counterfeit currency. It was largely expected that a substantial part of the currency that ceased to hold value would not be returned to the system by the protagonists, even though no numbers were provided. With the Reserve Bank of India (RBI) now providing figures to show that all the money came back, it is reasonable to conclude that there was actually not much black money residing in cash. Unless the Income Tax Department is able to come up with numbers to say that the notices served on the deposit holders have fetched a reasonable sum of money as fines and penalties, the argument that all this money was of true quality cannot be contested. Also, the result of the second income declaration scheme introduced by the government during this phase is awaited as the amount of tax cum penalty collected would be known.
Terror strikes did reduce when currency was not available. But the return of new currency subsequently can also be related to the increase in incidence of such incidents. When warped and perverse ideology drives people, there will always be ways found to create fear and even if Rs 500 or Rs 2,000 notes are done away with, the same could be perpetrated with smaller denominations of Rs 100 and Rs 50. The same holds for counterfeit currency, as the quantum is only open to speculation as few people holding such currency would come forward and submit to the banks for conversion. Besides, there is no assurance that the new currency cannot be counterfeited.
When it looked like that there would not be too much black money unearthed, the objective of going digital was espoused. Now, if one wants a digital economy, one would not normally remove currency and bring it back in the same quantity, which is what has been done. A more pragmatic way would be to provide incentives for such migration as demonetisation would not have been the first choice. If these notes were simply withdrawn and not replaced, then this objective would have found more support. Currently, the digital volume of transactions has also stabilised and been volatile, which does not give the sense that people have gone digital even while the volumes have increased sharply. Cash holding with households also appear to be moving back to the earlier levels.
At the next stage, the goalpost was directed at the number of income-tax assesses, which was never on the horizon when the move was brought about. Now to increase the tax base, countries normally would not demonetise the currency, but instead map large spenders with the income-tax records or other such connections using Big Data. In addition, since the number of assesses has been increasing over the years, attributing the same to demonetisation could, at best, be ex post rationalisation.
Was this move, then, a wrong step taken? Theoretically, demonetisation has always been considered as one of the tools that could be used to tackle the menace of black money. Hence, such an experiment was sound, though the results did prove—just like how the null hypothesis proves in econometric models—that the link did not exist.
The cost, however, has been significant. First, India’s GDP may have been sliced by 1 percentage point (8% growth in FY16 was followed by 7.1% in FY17, which was a favourable year in all other terms). The banking system went into a disarray as there was large liquidity that had to merit RBI intervention, which imposed a cost that is finally revealed in the lower surplus of the central bank by almost Rs 35,000 crore. The government has to now deal with a lower level of transfer from RBI, which was not factored in the Budget and hence will have to strive hard to balance the deficit. Industry took a temporary hit with consumer-oriented industries being impacted and small and medium enterprises (SMEs) taking the brunt. It may be hoped that some of these repercussions would get reversed in the next few quarters.
Are there any positives? First, with all the money coming back into the system, there can be better audit trail of such flows. However, if all the money that came in was genuine, and the same has been withdrawn, then the net trail may not amount to much. Second, to the extent that some transactions have migrated to the digital space, the trail becomes transparent. Third, if the number of income-tax assesses has increased, there will be higher revenue flowing in in the coming years. It, however, has to be seen if the final amount that comes in will be significant or not, though, admittedly, it would be difficult to apportion some of these gains between demonetisation and the normal course.
The interesting question that we should now ask ourselves is whether or not we would demonetise high denomination currency notes again to meet whichever goalpost we set for ourselves?