There is no straight answer to the question that, Was Narendra Modi‘s decision to recall Rs 500, Rs 1,000 notes overnight — the biggest blunder or the biggest reform step taken? Even if there is no easy answer for this question, one thing is for sure that his was the biggest and boldest decision taken in the history of Modern India. No other PM could have taken this decision other that Narendra Modi of course. In spite of knowing that the result of this decision may create or destroy him, he took the risk. But he got back more than his expectation. Even though the public went through all the problems and harassment, they still supported Modi, or better to say, supported and admired him even more than before.
If going a little back as to the events that led to demonetisation, nobody could have pad much attention to the word demonetization other than economists and academic enthusiasts. In 2014 on the 20th Lalit Doshi Memorial Lecture, Raghuram Rajan, governor of Reserve Bank of India (RBI) spoke about the demerits of demonetisation. He said that demonetisation is often cited as a solution, but the clever always come up with bigger solution to get around with it. The only thing that it can do is find a handful of people who could not find solution to convert the black into white. According to this statement, it is clear that RBI was against demonetization back than in 2014. But recently, economic affairs secretary, Shaktikanta Das told members of the Parliamentary Standing Committee that Rajan was on board on the demonetisation decision.
Even after knowing all of this, it is still not clear what exactly led Narendra Modi to walk on to the stage on 8 November and went on with his televised announcement.
“To break the grip of corruption and black money, we have decided that the 500 rupee and 1,000 rupee currency notes presently in use will no longer be legal tender from midnight tonight, that is 8th November 2016,” Modi had said in his speech,hat lasted about 45 minutes, thus unveiling his biggest and boldest decision of his political career after taking over the PM’s office in May 2014.
Raghuram Rajan had stepped down as the RBI Governor on 4 September 2016 and deputy Urjit Patel took charge.
The RBI and its new governor, Urjit Patel, were on the sidelines throughout the mega show. Their job was limited to issuing circulars of the already hinted and announced decisions by the government’s ministers and bureaucrats and count old notes that returned to bank counters post demonetisation.
The main question that still lingers is beyond the political gains for the incumbents, what did the country gain or what did it lose from Modi’s biggest move in three years?
According to a report of India Today, at the time of demonetisation, currency worth Rs 17.77 lakh crores was in circulation in the economy. Out of this, Rs 15.44 lakh crores was in high denomination notes, which were phased out. Rs 2.33 lakh crores was in small denomination notes with a value of Rs 100 or less. The government’s internal calculation is that if currency in circulation had continued to be printed at the same rate as before demonetisation, then by May 2017, currency in circulation would have been of the value of Rs 19.25 lakh crores. According to RBI figures, at the end of April this year, the total amount of currency in circulation was Rs 14.2 lakh crores. This means a difference of about Rs 5 lakh crore.
ut, this calculation lacks logic. For one, even assuming the projections are true, a decline in currency in circulation is no way any tangible gain of note ban for the government. Had a large portion of cash got extinguished outside the banking system and in turn reduced the currency liability of the RBI, the government could have found way to claim the money and exhibit it as the demonetisation gain. But this never happened. Instead, almost all currency demonetised returned to the banks. It is even possible that significant portion of the black money in cash would have found way to the formal system through benamies.
There are only two possibilities. One, there is just not enough cash being printed to meet the demand. Two, people have shifted to digital transactions hence not necessitating the need for cash. But, terming it as demonetisation gain is illogical and misleading.
According to Sushil Chandra, Chairman of Central Board of Direct Taxes, the income tax department has identified 1 lakh suspected cases of tax avoidance and undisclosed income of Rs 23,144 crore. About 91 lakh new taxpayers have also been added post the demonetisation. If the demonetisation has caused addition of new taxpayers, it is a good thing but as far the recovery of black money goes, the achievements so far is disappointing.
There are some good points too, about demonetization:
- Note ban has helped to formalise the economy with more number of depositors now traceable.
- Modi government’s push for cashless economy post demonetisation has helped to improve the use of non-cash methods for regular transactions.
- Launch of BHIM app and incentives for use of cashless transactions have encouraged more number of people to take the digital shift.
But it also brought along many problems with it:
- Lakhs of jobs have been lost and small businesses have faced a tough time.
- Invited protest from even the right wing workers’ unions.
- Shook the investor confidence.
French economist Guy Sorman told PTI in an interview that, “Demonetisation was a successful political coup which was heavily applauded by a majority of the Indian people… Simultaneously, it has disrupted commercial transaction and slowed down the economy at large. Did it stop corruption? Of course not.” While economists like, Jagdish Bhagwati and Bibek Debroy have praised the government to take the bold step of demonetization.
So, the question still does not have an answer, as to demonetization was a blunder or a reform?