We'll never know whether demonetisation was a disaster or a boon

In the end, it's clear that the note ban decision threw up only two clear winners: politically, the BJP and commercially, the digital economy

Five years ago on this day, Prime Minister Narendra Modi stunned the country by announcing that he was demonetising the Indian currency from midnight. What happened after that has been fully documented. So there’s no need to revisit all that.

But despite the extensive coverage and analysis, there is still no clarity as to why Mr Modi decided to demonetise. There are two distinct schools of thought.

One says it was to rid the country of black money. The other says it was to deprive the Opposition of cash in the run up to the Uttar Pradesh election due in four months time in March 2017.

As Indira Gandhi showed with the nationalisation of the banks in 1969, good political ideas, if they have to succeed, have to be dressed up as good economic ideas. The nationalisation decision had put Mrs Gandhi in power for a decade-and-a-half at the Centre and made the Congress party the only party of governance till 1996. But it completely ruined the banking system of India. On the other hand, it hugely expanded rural banking. Likewise, the demonetisation decision put the BJP in power in UP, from where it is unlikely to be dislodged next year. It has also made the BJP the main party of governance.

But what has it done to the economy?

Many explanations

Critics of the decision say that it stopped economic activity dead in its tracks, especially in the informal sector. Supporters say that it actually doubled the level of formalisation to 40 per cent now from 20 per cent then.

Economists, meanwhile, are wondering what all the fuss was about if all the cash that was drained out on November 8, 2016 came right back in 2019 and is now at an all-time high. In fact, some of them are even treating cash as intrinsically undesirable.

Others are hypothesising that this could be because of Covid which has increased the demand for cash globally, both as a preferred means of conducting transactions as well as a way of keeping something aside under the mattress for a rainy day.

As for those who get paid on a daily basis — and their number runs into a few hundred million — their demand for cash has gone up for an age-old reason: inflation. They need more notes for every transaction. It’s that simple.

Politicians, on the other hand, are once bitten twice shy. Their demand for cash, far from diminishing, has increased because there has been a 15 percent increase in the number of voters since March 2017. This means an increase in the demand for cash even if the amount spent per voter remains the same or increases only slightly.

No clarity

When you add it all up you will find that there is no clarity at all. People will believe what they want to believe.

Thus there are those who opt for the economic reasons, those who opt for the political motives, those who emphasise the psychological reasons and those who look at it from a  purely practical viewpoint.

There are those who say it harmed the economy and those who say yes, but only for a short while. Some say the damage is permanent because a lot of the output of the informal sector before demonetisation has now been displaced by the formal sector. Supporters say this is a good thing.

In the end, it is probably best to ask the all-important question: who has benefitted the most. There are only two clear winners: politically, the BJP and commercially, the digital economy.

It is now up to each citizen to weigh the two in balance and decide for himself or herself whether demonetisation was a disaster or a boon.

My guess is that as with bank nationalisation we will never be certain.