Exactly a year ago, Prime Minister Narendra Modi announced an ambitious but enormously disruptive decision to invalidate Rs 1000 and Rs 500 notes, ostensibly to combat corruption, counterfeiting and terror funding. Demonetisation triggered public panic, slowed manufacturing, sent workers home and affected economic growth.
The RBI said in August that 99 per cent of the cash was returned. But the move forced citizens to adopt digitisation at an unprecedented pace, in a country where 80 per cent of transactions were conducted in cash. And it helped the BJP win the election in UP.
What has India gained and lost from demonetisation and what are the lessons learnt?
Demonetisation was a courageous policy decision fraught with high risks. The purported objectives of the decision were to eliminate fake currency, weed out black money, and address tax evasion. Later, digitisation of the economy was also added to the list of objectives.
How has demonetisation fared on these objectives? The RBI Annual Report noted that the detection of counterfeit notes was 20.4 per cent higher in 2016-17 compared to the previous year. The detection of counterfeit notes increased across all denominations, notably the invalidated Rs 500 and Rs 1,000 notes. But then, counterfeits of the new Rs 500 and Rs 2,000 notes were also detected in the same year. This shows that invalidating the currency may not be the appropriate policy response to check counterfeit currency.
On black money, it was envisaged that a large amount of the demonetised currency will not find its way back into the banking system. However, the RBI Annual Report stated that 99 per cent of the demonetised currency has returned to the system. While this, by itself, cannot be counted as a success or failure of the move, the lesson is unambiguous.
Here are other sharp perspectives on demonetisation:
Milan Vaishnav, senior fellow, Carnegie Endowment for International Peace
T.S.R. Subramanian, former cabinet secretary
Ritika Mankar Mukherjee, senior economist, Ambit Capital
Manish Tewari, national spokesperson, Congress
Arun Kumar, retired professor, JNU
Pranab Dhal Samanta: editor, ThePrint
Syed Zafar Islam: BJP spokesperson for political and economic affairs
Cash is not the only form of black money. There has been some initial evidence of suspicious deposits. The ultimate success of demonetisation depends on how effectively the regulatory regime detects the unaccounted money in the system, given the fact that this will give rise to legalism and litigation.
The measure has given a fillip to digital transactions. The currency in circulation has dipped to a new normal. The past few months have seen a record surge in assets under management by mutual funds, which is a manifestation of increase in financial savings.
The moot question is: Was the short-term disruption worth it? The answer is a qualified “no”.
Could all this be achieved in a more non-disruptive and calibrated manner? While the short-term disruption is evident, the benefits are still unfolding. To achieve these objectives, tax reforms and effective supervision over suspicious transactions are better alternatives.
Radhika Pandey is a consultant at the National Institute of Public Finance and Policy (NIPFP)
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