The Reserve Bank of India’s (RBI’s) decision to “withdraw” the 2,000-rupee note from circulation was to be expected. Its ad hoc introduction was meant to address the transactional crisis in the aftermath of demonetisation (DeMo) in November 2016. The existence of this high-value banknote is patently at odds with the idea of a “less-cash” economy that the government is wedded to. Its printing was stopped in 2018-19. DeMo perhaps satisfied the legal “test of proportionality,” as ruled by the Supreme Court in January this year, more than six years after the sudden decision shook and rattled the economy and the public at large. But its financial and human costs have far outweighed the modicum of gains, and have taken many frustrating years to dissipate, causing the economy to take a material hit.
The Centre’s gross tax buoyancy stood at an impressive 1.6 in FY16, the year before DeMo, and at 1.5 in FY17, mid-way through which the drastic decision was announced and then implemented haphazardly. The buoyancy slipped to 1.1 in the next year, and 0.8 the year after. The pandemic obfuscated subsequent data, but despite policy actions to expand the bases of both the direct and indirect taxes and their appreciable results, the buoyancy was again just 0.8 in FY23. Clearly, DeMo-induced incremental buoyancy was small and temporary and it was far from structural. Tax buoyancy similar to FY16-FY17 occurred in at least four years in the previous two decades, sans any collateral loss, as inflicted by DeMo. Over 99.3% of the demonetised notes returned to the banking system in the stipulated period, disproving the policymakers’ expectations that a sizeable part of the holding as “undisclosed income” would be extinguished. Neither have the two subsequent income disclosure schemes—IDS and PMGKY—yielded any stupendous results.
Of course, digital payments have risen at a much faster rate since that abrupt cancellation of the legal-tender status of 86% of cash in circulation (CIC). In more recent years, UPI-enabled digital commerce has seen a scorching pace. However, the CIC too has kept pace with the digital drive, so much so that, not merely in absolute terms but also as a fraction of nominal GDP too, cash hasn’t stopped growing as yet. At `34.6 trillion as of March 31, 2023, the CIC stood at 12.7% of GDP for FY23 (second advance estimate), compared with about `18 trillion (11.7%) immediately before DeMo (early November, 2016) and 10.7% in FY16. The CIC peaked at 14.5% of GDP by the end of FY21, but has since fallen. It seems cash no longer changes hands as much as earlier, even as it remains in circulation, a larger portion presumably hoarded.
It may be assumed that, absent DeMo, CIC would have risen further, but the question to be asked is whether cash is indeed the cause of black money, which DeMo sought to whittle down. Or more diligently, is curbing cash transactions the most efficient and cost-effective way of launching an assault on black money? The answer is “No”. Also, cash is not necessarily bad or wholly dispensable in an economy, which still has a very large “informal” constituent, populated by a much larger segment of the population, than in the formal category. The journey towards “a less cash economy”—rather than a cash-less economy—is to be welcomed, for the comfort and ease it would bring, but it is hardly an effective remedy for tax evasion.