The government’s move to demonetise high-value currency, announced on November 8, 2016, was meant to root out unaccounted wealth, stem terror financing and curb counterfeiting. Looking at the last one year, did demonetisation achieve the objective it was meant to? Has corruption come down post the note ban? This author decodes Demonetisation, unleashed on Indian citizens on November 8, 2016, will probably go down as the biggest shocker for them in a decade. As the dramatic late-evening announcement by Prime Minister Narendra Modi started sinking in, the bank and bank managers suddenly became the most important entities in our lives. The ordinary mortals spent the next few days standing in queues, while for some, a friendly banker meant a shorter wait. The privileged ones managed everything from the comfort of their homes or offices. However, this gave rise to a new opportunity that was immediately encashed by the so-called “consultants” and “brokers” for a fee. For the next couple of weeks, all discussions revolved around demonetisation. Before the note ban, India’s GDP was growing at more than 7 per cent and it was expected that growth would move up in the third year of Narendra Modi’s government, as that is when all the initial work starts to yield results. Then, suddenly, on that fateful day, Prime Minister Modi declared this was a war against black money, corruption and fake currency. The PR machinery successfully convinced people that this pain was a “sacrifice” to catch the black money hoarders. However, over the next seven weeks, with the pressure building up amid public angst, the narrative shifted to a cashless economy and formalising the grey economy, thus increasing the tax base. Initially, for four weeks, we were fed the demonetised cash return data to prove the success of the scheme, but when the figures crossed 80 per cent of the demonetised currency, the data sharing was stopped abruptly on December 13. There is no doubt that obscene amounts of black money were generated in the past few decades, especially the last one. The question remains whether most of that was lying in cash in India? Reports suggest that it was mostly transferred abroad or converted into assets, mostly properties and gold. I wouldn’t discount the fact that some of it have been converted into “white” via the stock market utilising the long-term capital gains benefits. So, the big black money seems to be parked safely and that which was left in the system might have been loose change. Black money is generated primarily via two routes. First, profits earned in ethical businesses but taxes wilfully avoided. And second, earnings out of banned activities like terrorism, underworld dealings, extortions, corruption, etc. Though the colour is the same, the solution is not. It seems the government erred on this point and that led to catastrophic consequences, albeit for a month. The collateral damage continues to this day. The bitter truth is that a significant part of India’s small and medium enterprises fall in the first category. More importantly, they provide employment to a large part of the population. Did demonetisation achieve the objective it was meant to? Today, the currency in circulation is back at nearly 90 per cent of the October 2016 levels. Digital transactions shot up immediately after demonetisation as 86 per cent of the currency was sucked out. However, the pace slowed down as cash returned to the system. Demonetisation forced many non-digital ones to convert but failed to lead to a tectonic shift the government was expecting. And has corruption reduced drastically post Demonetisation? It took the Reserve Bank more than eight months to confirm that nearly 99 per cent of the currency (or is it actually more than 100 per cent) was deposited with banks. How the government will be able to prove the quantum of black money among these deposits is a subject of probe and litigation which might go on for the next few years.
The fake currency fear also seemed unfounded as only about 762,000 pieces of fake currency amounting to less than ~20 crore were detected in 2016-17. This is merely 20 per cent higher than the previous year, proving the demonetisation exercise did not add a huge number. Thus the initial reasons for demonetisation go out of the window. Coming to the argument of shifting from grey economy to formal economy, I would ask whether it needed such a huge blow, especially when GST was in the works. There are times when you need to push through a change, but if that puts very livelihoods of a large number of people at peril, you should avoid that path.The small & medium enterprises were badly hit as the cash crunch eroded their working capital and the overall slowdown which ensued resulted in lower order flows. There are reports that many have already shut shop and the trend would continue due to the GST disruption. This brings to the fore the question of employment since this segment is a huge employment generator both in the formal and informal sectors. The workers might be left high and dry, while employers’ capital might find its way into the stock market for more profitable deployment. The money (whether black or white) invested in an economic activity, generating revenues and providing employment, was now deployed in speculative activity. Demonetisation also threw up a few beneficiaries. It resulted in unexpected gains for a section of the population that helped convert the old demonetised notes into new ones. This resulted in a partial distribution of wealth. The money stashed away earlier was now transferred to bank accounts. Many families would have realised that they had more money than they had displayed earlier. After a month or two of shock, part of this money flowed into consumer buying. Again, the question is whether such buying can sustain without fresh generation. The biggest beneficiary of the demonetisation move, however, was the stock market. Lower fixed deposit rates, a depressed real estate market and lack of other investment avenues resulted in the TINA (there is no alternative) factor playing out. Huge liquidity on the one side and a performing stock market on the other, resulted in relentless flows, playing out a vicious cycle. Even the retail liquidity which found its way into the stock market, whether directly or via mutual funds, are finally being deployed for speculation (whether we call it short-term trading or long-term investment). How much of this money is flowing into the creation of revenue-generating assets for the economy? Even the IPO route nowadays is mostly used to liquidate investments of the government, promoters and private equity investors. I wonder how an economy can grow without asset creation at the ground level along with weak employment generation? Demonetisation is one such decision that once set in motion cannot be reversed, but it could be tinkered with. This tinkering resulted in about 66 notifications in a matter of seven weeks, which could be a record in itself. If the clock were to be turned back, I am sure, with the benefit of hindsight, Modi would have given a miss to the demonetisation idea (if it was really meant for the purpose of eradicating black money, etc, as publicly announced) and concentrated on GST to achieve his goals of a largely formal economy. It would have averted a forced slowdown, the direct costs of demonetisation and deaths of many innocent citizens. The author is an independent market analyst. Views expressed are personal