Even after a year, #Demonetization is the longest trending hashtag, such is the enormity of this disruptive reform. For an economy heavily dependent on cash transactions, demonetization was an economic shock. The move quickly sparked a nationwide cash crunch, the worst the country had seen. The government's unpreparedness was visible, and it led to serpentine queues in banks and at ATMs across the country.
Was this exercise that does not promise that there will not be any future corruption necessary? Can the outcome of such a hard-hitting measure be accurately defined especially in a complex, multi-layered society like India?
Even a year is too short a period to pronounce any judgment, but I try to look back and understand the impact rationally.
While political commentators may speculate how it impacted on people's perception, in the era of perception politics, even the economic commentators ignored the monetary economics of the policy.
"Since all the demonetized cash has come back, where is the black money?" asked Congress spokesman Randeep Surjewala, only who, in my honest opinion, should have the proper answer to this question.
The demonetization timing signifies the resolve of his Government to cure the country of “cancerous black economy.” No timing is perfect, but in hindsight, the timing seems obvious, if one connects the dots and analyses the commendable chronology
- At first, Constitution of SIT on Black Money.
- The massive roll-out of the Pradhan Mantri Jan-Dhan Yojana nearly completing all citizens’ access to bank accounts.
- A crackdown on hoarders /foreign accounts (approximately RS. 80,000 Cr was collected).
- Proactive engagement with foreign governments to facilitate automatic exchange of information, and renegotiating tax treaties
- The Benami Property Act made operational after 28 years of passage of the bill.
- Cash transactions limits were brought with streamlined penalty provisions.
- Income Declaration Scheme was another window of opportunity. (Rs. 65,000 Cr collected)
- Linking PAN and Aadhaar and Aadhaar and Bank A/c for identifying money trails.
Commentators forget that outright confiscation of money had not been and can never be the objective of any government's policy. The primary aim of demonetization had been:
- to track black money hoarders, kill the anonymity of cash and designate an address to it,
- bring hoarded cash into the banking system (formal economy),
- bring the cash hoarders into the tax net,
- reduce the economy's heavy reliance on cash,
- expand the digitization of monetary transactions, and
- Reduce the flow of black money in the system.
The entire banking and postal system were caught unaware. It seemed that the planning ahead of such a massive event lacked matching preparedness.
Many people who got an opportunity to cheat the country had cheated or at least tried to trick. It's a sad reflection on our society but clearly tells how deep the rot is.
The lies, rumors, and propaganda were peddled to ensure that demonetization failed. The irrationality that surrounded the narrative was based on generalized assumptions. In a country with a vast population like ours, these narrations were primarily based on personal anecdotes, clearly, not looking for evidence, but for confirmation.
The opposition's propaganda was clear. Spread the negativity, suppress all the advantages and highlight the side effect. Many had poked fun at changing guidelines. Whether it was during demonetization then or GST now, rarely one talked about or felt delighted to see responsiveness on the go to public needs and discomfort in the wake of unusual circumstances.
"Please bear with me for 50 days, after that, if you find any fault in my actions, I'm willing to be punished," Modi said in Goa and took people suffering from the acute shortage of cash, in his stride. People responded with patience.
Demonetisation was, in fact, a reset button, and it left the parallel black economy choked and gasping. A check was inevitable. At least the hard data suggests that the direct benefits of demonetization can be reasonably listed:
- Massive increase in Income tax filings,
- The number of new taxpayers jumped by 26% from 66 Lacs (2015-16) to 84 lacs.
- Self-Assessment Tax paid by non-corporate taxpayers increased by 40%.
- Deposits between Rs 2 lakh and Rs 80 lakh were made in about 1.09 crore accounts with an average deposit size of Rs 5.03 lakh. [Amounting to Rs 5.5 lacs crores]
- Deposits of more than Rs 80 lakh were made in 1.48 lakh accounts with average deposit size of Rs 3.31 crore. [Amounting to Rs. 4.9 lacs crores]
- The IT Dept. had issued 18 lakh notices to persons whose cash deposits were not matching with their income profiles.
Of course, final assessments will take time. Not all the money deposited in banks post-November 8 last year can be termed either 'white' or 'black.' But every penny's trail has been established.
"Now it is with the tax administration and other enforcement agencies to use big data analytics and crack down on suspicious transactions," said Finance Minister, Arun Jaitley.
The big data analysis of this sort also leads to unearthing companies 'on paper.' The leads gathered due to data collected during demonetization period have led to the identification of 2.97 lakh suspect shell companies out of which, 2.24 lakh companies have been already de-registered from the books of Registrar of Companies.
Demonetization pushed our economy towards the formalization, resulting in government's stated agenda of greater transparency in financial dealings. Another consequence of demonetization has been its impact on the financial sector.
- Liquidity bonanza to banks: Demonetization reduced the amount of cash available to the citizens, which in turn increased the bank deposits. has created a new lending capacity to the banks
- Lower Interest Rates: While, lowering interest rates was a policy priority, expensive loans and increasing cost of money in the country has been crippling India’s entrepreneurs.
- A catalyst for new financial savings: Households appears to be investing in equity and mutual funds. This resulted in Nifty and Sensex both up by 20+ % and at the same time, 1.2 crore new Mutual fund folios
- Lower property prices:
- Lower Inflation
Source: Economic Times
Demonetization has also laid the foundation for other anti-corruption measures, such as:
- With a shift to less cash economy, India has taken a big leap in digital transactions.
- The massive drop in illegal 'Hawala' transactions.
- Cash facilitates crime because it is anonymous. By inflicting a cost, it cripples the ability to engage in crime that was easier with substantial cash in hand.
- A less-cash economy is an excellent balance between maintaining ease of financial operations and also curbing malpractices.
- Benefits to workers: It has brought out related benefits to workers who were denied social security benefits in the form of EPF contribution, subscription to ESIC facilities, etc. More than 1 Crore (30% of existing beneficiaries) workers were added to EPF and ESIC system post-demonetization.
- The reduction in terror incidences, of stone pelting and protests in J&K and Naxal activities in LWE affected districts, are also attributed to the impact of demonetization as these miscreants have run out of cash as well as access to the fake currency.
Overall, the country has moved on to a much cleaner and transparent financial system. It is possible for those who are critical of demonetization that the benefits may not yet be visible to some, but most do not wish to see.
Looking at demonetization politically suggests that it was a risky affair because of its inherent disruption. But it is a strange phenomenon that PM Modi's critics come mostly from India's intellectual elite, while despite extreme hardship, the country's poor have cheered demonetization. For them, he (Mr. Modi) is fighting against black money and corruption, and taking steps to clean up the country, physically, morally and spiritually and those who oppose him are likely to be corrupt.
The electorate has given clear signals that it was their hidden urge that they care a lot about the war on black money, and it was this urge which manifested in the verdict of people in May 2014.
Demonetization, along with Goods and Services Tax (GST) will widen the formal economy that will fundamentally change the character of India from corrupt Nehruvian ecosystem to transparent transactional economy!
I have no doubt that the next generation will look at demonetization with a sense of pride for providing them a fair and honest system to live in.