This month the Indian government has two major reports to delve into. One, the Reserve Bank of India (RBI) has finally disclosed in its annual report that 99 per cent of the currency notes that were scrapped overnight on the evening of November 8, 2016, returned to the banking system. In other words, the claims that Prime Minister Narendra Modi made during his speech that people holding black money would have sleepless nights proved not only wrong but also allowed the hoarders to legitimize most of the dodgy cash they held. They might have struggled hard to manage things but clearly they emerged out to be the winners.
Two, Raghuram Rajan, the former Reserve Bank Governor, finally spoke about demonetisation. In his book – I do what I do – Rajan says that till the last day of his tenure, i.e., September 3, 2016, the RBI had not taken any decision regarding demonetisation. This means the government took this decision within a period of two months, without any preparation, without even taking into account its pros and cons.
The book has confirmed the thoughts that the critics have been sharing for so long. Rajan has also said that the government had sought his views on demonetisation and he had submitted a detailed note listing the prerequisites for scrapping the currency and the time required for executing this gargantuan task. Not only the process, he had also suggested the alternatives, which could have saved the economy from this colossal blunder that the government committed albeit for winning the hearts of people, especially from the most populous state -– Uttar Pradesh.
Yes, demonetisation certainly helped the government in winning the UP elections. The common man, who does not understand the complex formulae that govern the economy, was happy despite the problems he faced while standing in long queues to get the money exchanged. Somehow, he had a gut feeling that Modi was doing something and he would be able to reap some benefit in the long run.
It was only when the daily wage labourers struggled to find work, when the small and medium entrepreneur had no money to buy raw material or pay salaries that the people started realising the folly of what the government did. The situation in the cities was much better than in the remote villages where the banks had no cash to give people. Leaving aside the daily chores, we could see women, youth and elderly people in queues, expecting that they would get some money.
The government ignored the warning given by the former RBI governor that the long-term benefits would outweigh the short-term economic costs. And the results are clear. From an economy, which grew at the rate of 7.9 per cent during the last quarter of 2015-16, it slowed down to 7 per cent in October to December 2016 to 6.1 per cent in January to March 2017 and to 5.7 per cent in April to June 2017. This certainly is not the end. The affect is likely to trickle down further.
Consumer-spending continues to be low and businessmen are wary of investing money. The ratio of private consumption to GDP reduced from 66.2 per cent during January to March 2017 to 62.3 per cent in April to June 2017. Fiscal deficit has already touched 92.6 per cent of its annual target during April to July 2017, leaving little room for what is called fiscal consolidation, something the government stuck to in the past two years.
The government has been increasing expenditure to boost demand. But the current state of fiscal deficit has left no scope for further spending. Now the government can either keep on spending and cross its fiscal deficit target by at least 2 times of its target and face the wrath of rating agencies or can curtail expenses without expecting growth. So far, the agencies have been dubbing the Indian economy as one of the most robust in the world. Post-demonetisation, things will certainly not remain the same. And yes, the effect of cash squeeze is likely to continue during the next financial year as well.
The informal sector has faced the biggest blow. The low-skilled workers or labourers who used to get menial jobs are now unemployed. The farmers were forced to sell their produce at a much lower price during demonetisation. How can the government expect them to repay the crop loans? Under pressure, a few state governments have already waived off a major chunk of crop loans which is likely to have a negative impact on growth and worsen the state of fiscal deficit. They have no other option but to curb capital expenditure. Simply put, the trajectory of growth is no longer exciting.
Despite a low lending rate, the banks have not seen any increase in credit. Contrarily, there has been a spike in bad loans. The masterstroke has certainly caused a lot of damage to the country and the common man.
“Only an authoritarian government can calmly cause such misery to the people”, says Rajan, “with millions of innocent people being deprived of their money and being subjected to suffering, inconvenience and indignity in trying to get their own money back".
Now that the RBI report has finally proved that demonetisation could not do what it was intended at, the government has been changing statements nay the objectives of demonetisation.
Recently, the finance minister came up with a new set of goals. We are now told that the aim was to march towards cashless economy, expand the tax base and push digitisation and formal sector. The government is now relying on data for identifying suspicious deposits.
And those who availed of this opportunity of converting black money into white has shown cash deposits in their income tax returns and deposited tax on the prescribed rates. They are highly confident that they will come out clean as they have done in the past.
As far as moving towards a cashless economy is concerned, the available data on digital transactions prove the claims to be baseless. The two months of less-cash in people’s hand could not change their habit of transacting in cash. The ministry of electronics and information technology submitted a report in the Lok Sabha on August 2 clearly mentioning that “digital transactions increased during November-December 2016 and have plateaued thereafter”. Alas, all this mess for a temporary growth in digital payments!
To rub salt into the wounds of the general public and paint this massive exercise as a boon to the Indian economy, the ministry of finance released a report titled “Demonetisation immensely beneficial to Indian economy and people”. The report was released on August 31 soon after the RBI published its annual report.
The report says that “the government had expected all SBNs (specified bank notes) to come back to the banking system to become effective usable currency”. Clearly, the finance ministry thinks that people have forgotten what Modi said on November 8, 2016. Those words still echo in our ears, Jaitely Saab. “The 500 and 1,000 rupee notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper”, Modi said in a thunderous voice.
Even the finance minister had reiterated the objectives, two days after Modi’s speech, when he told a reputed news channel that of the 14 lakh high-value currency notes, “some would certainly get extinguished” as people who used cash for criminal activities will not take the risk of depositing it back into the system.
And there were many, who had made similar remarks like the Attorney general Mukul Rohtagi, Niti Ayog member Bibek Debroy etc.
Another argument that the government has given in the report is that “a total of Rs. 17526 crore has been found as undisclosed income and Rs. 1003 crore has been seized”. The money actually seems to be huge but if we compare it with the last two years, there is not much increase. Yes, there may be some revelations in the future but the sore point is that people easily converted black money to white.
Another pointless claim is that “52.4 crore unique Aadhaar numbers have been linked to 73.62 crore accounts in India. As a result, every month now, about 7 crore successful payments are made by the poor using their Aadhaar identification. The government now makes direct transfer of Rs. 74,000 crore to the financial accounts of 35 crore beneficiaries annually, at more than Rs. 6,000 crore per month”. Unfortunately, this has nothing to do with demonetisation. The ministry has filled this report with unnecessary and irrelevant information thinking that people will fall for it.
It seems the government is trying to reassure itself that the whole exercise was not a failure by publishing such reports. On the contrary, the cost of printing currency has doubled as the RBI had to spend Rs. 7965 crore between July 2016 and June 2017 as compared to Rs. 3420 crore in 2015-16. Around 23.8 billion fresh currency notes were injected into the economy. To cut the long story short, the real value that a 500-rupee or a 2000-rupee note holds is much less than what it is being used for as the printing cost is too high.
It will take at least two or three years for the country to recover from the shock called demonetisation. Rumours are rife that the 2000-rupee note may be withdrawn soon. Since Modi is still not convinced by his faulty policies and the finance ministry has gone out of its way to please him by presenting a faulty MIS, would India Inc. face a similar scheme just before 2019 elections? Hope this remains a thought only on paper.
(The writer is a company secretary and director communications, Deepalaya and can be reached at firstname.lastname@example.org)(Published on 11th September 2017, Volume XXIX, Issue 37)