When PM Modi was awarded the Seoul Peace Prize recently, the major achievements which drove the selection were stated to be economic growth and initiatives like demonetization, among others. The exercise that was undertaken at such a massive nation-wide scale in a country like ours and that yet managed to get a good degree of acceptance and cooperation from the people and achieved its purpose, has become the focal point of ungrounded allegations.
Inexplicably, the fact that nearly all of the currency came back into the banking system as revealed by the recent review by the Reserve Bank of India (RBI) on demonetization is being alleged to show the ‘failure’ of the exercise.
Like in most other cases in which the Opposition tries to allege something, the exact opposite is true here also. Not only did demonetization lead to a complete wipe-out of fake currency – hoarded over a long period of time and funneled into numerous mischievous uses by terrorists and criminals for a long time – in one single blow at that point of time, but also led to major unintended social redistribution benefits for the people.
The latter was made possible, since the people were successfully able to deposit their black money – and that of others for a commission which benefitted the poor – and the government was not able to tax or penalize this income. Had the government been able to do so, it would have resulted in windfall revenues for the government, which would have gone into welfare and social schemes. It would have been an immense wastage of the people’s money to funnel it into social schemes where it could be absorbed and digested by the middlemen and the corrupt machinery, with very little of it reaching the people.
It is in this context that the figure of 99.3% of the currency that has come back into the banking system needs to be seen. It simply means that this amount of money has now become accounted for, which would not have otherwise happened. At that particular point in time, right after demonetization and for some months following it, the entire economy of black money was struck a blow – the money hoarded in cash, the money that goes into real estate and other instruments that fuel speculative demand and the entire economy of fake currency.
At the outset, demonetization was never a punitive exercise meant to root out, punish and jail the people who allegedly evade taxes. The purpose was to account for black money. If indeed demonetization was a vengeful exercise to punish the people themselves, then nearly the majority of small and medium businesses which always prefer cash, the home-makers and the common man who save piles of cash, would have been behind the bars.
The point is never to punish the people, but to account for unaccounted money and, in the process, reduce the speculative demand and the ensuing bubble. Demonetization also served a larger national interest, by striking at the roots of fake currency.
At the same time, the thorough redistribution was one of the major unintended benefits of this exercise. In the process of converting the currency notes, the government did not get any benefits by the way of revenue.
Given the flexibility with which the common man – including small and medium businesses – was able to exchange the money with a thoroughness that resulted in nearly all of the unaccounted cash turning into white money, is a result that, in the end, benefits the people themselves. It doesn’t benefit the government.
Over time, Indians, thanks to the socialist-leaning mixed economy till the 1990s, a legacy inherited from the Nehruvian era, have perfected the art or the survival instinct of getting around bogus rules designed to stifle them.
For the common man in India, getting around the rules has been a survival instinct. It is no wonder, then, that economists the world-over are amazed by the fact that the wiping out of nearly 86% currency in circulation occurred so smoothly. Not only did Indians manage to return this cash and account for it in white in just two months, the process was overall smooth despite some daily inconveniences.
When the euro was introduced in 2002, people got a 10-year window to exchange their existing banknotes and reach a rate of 99% which the Indians managed to skillfully do in merely two months (Rajagopalan 2002).
It is not at all difficult to deposit cash by showing a trail of white transactions as gifts, donations etc. And after demonetization, within days, Indians came up with not one, but several innovative ways to turn their money into white. But the point is not what the Indians did, but that the end result was that all their money became a part of the capital. At the same time, the money that goes into speculative demand and fuels a bubble – such as investments in real estate and gold – was also struck a blow.
For instance, demonetization had a major positive impact in accelerating the household financial savings, which has reduced speculative demand. For the second time in nearly 20 years, the share of financial savings has outstripped physical savings (Mukherjee 2018). People have been investing more in financial products like bank deposits, mutual funds etc. rather than in areas like real estate, with bank deposits seeing a marked hike as expected.
At the same time, the few losses to the economy in the wake of demonetization have also subsided, with the economy touching a nine-quarter high of 8.2% growth in the first quarter of 2018-19 and seeing immense expansion in manufacturing, construction and agriculture and even private consumption (Mishra 2018).
At the same time, from the point of view of future and the validity of the exercise, the numbers tell that the tax base has increased drastically after demonetization. From only 3.8 crore Income Tax assesses in 2014-15, the number rose to 6.8 crore in 2017-18. Doing business in black was no longer easy. Similarly, the doubling in the numbers of non-salaried Income Tax Returns from less than a crore in the pre-demonetization period to 2.05 crore in the assessment year following demonetization, shows a marked and drastic change (Kapoor 2018).
That the political opposition chose to term something this logical a ‘scam’ to turn black money into white, is unfortunate but expected. An opportunity for the majority of people and small and medium businesses to convert their horde of black money or cash into their capital and benefit in the long run at little or no cost to themselves, is being termed a scam. While the real ponzi schemes that politicians operate – like Narada and Saradha scams in Bengal – and loot the poor of their money after misusing their trust, are acceptable.
Under such conditions, it’s apparent that the benefits of demonetization far outweigh the temporary losses to the economy and to the cash-dependent people, in the long-run.
The Unintended Redistribution
As already mentioned, in the process of demonetization, there were untold advantages to the common man. Had the cash deposited in the wake of this exercise gone into the government coffers, it would most likely have been misused. The spending on infrastructure and social schemes have endless filters and middle rungs which prevent the actual material benefit from reaching down to the people at the lowest rungs.
The entire funding sanctioned from the top, nearly always gets absorbed by these middle rungs through corruption, and this absorption of money is nothing but a huge wastage. Therefore, the fact that demonetization did not result in windfall revenues for the government system, is a big plus point.
During the process of demonetization, the most satisfaction was derived by the poor people standing in the long queues. They saw it as an equalizing exercise, not only because it hit everyone equally and there were no special rules for the rich, but also because the rich had to rely on their poorer workers and staff to get their notes exchanged. In the process, the poor also ended up getting a certain portion of the material benefits or money in exchange for performing these services.
Thus, demonetization had an unintended redistributive effect which benefitted the people at large and, at the same, put an end, in one go, to the bogus currency notes and brought them all into circulation for the benefit of the national economy and preventing the misuse of this money which became accountable.
The Deeper Significance
Demonetization was one of those phenomena which had a direct impact on the psyche of the people. A lot of aspects and changes that took place after demonetization may have reverted to their original state, but what is important is that a beginning had been made. For the first time, the nation came together and cooperated in the interest of the larger good, which is rare. Now that economic growth has stabilized and businesses are getting accustomed to the reality of demonetization and GST, they are settling down fast into the new system.
Cash usage is, indeed, going up once again, speculative demand areas such as real estate are showing signs of revival, while the use of digital payment methods – which had increased sharply after demonetization – is going back to normal once again. This was bound to happen, since demonetization was always visualized as a one-time exercise to strike the roots of fake currency in one go.
But despite these reversions, a beginning has been made in people’s psyche. Corruption and black money can no longer be taken for granted as a part of life. Demonetization has contributed to nation-building in this sense.
Kapoor, Virendra. 2018. The Sunday Guardian. September 8. Accessed October 7, 2018.
Mishra, Ranjan Asit. 2018. Livemint. August 31. Accessed October 8, 2018.
Mukherjee, Somnath. 2018. Daily News & Analysis. May 25. Accessed October 8, 2018.
Rajagopalan, Shruti. 2018. Livemint. September 3. Accessed October 3, 2018.
The Hindu. 2018. The Hindu. February 7. Accessed October 26, 2018.