When he made that dramatic announcement on November 8, 2016 extinguishing all existing Rs 500 and Rs 1,000 notes, Narendra Modi stated three major objectives of this sudden and draconian announcement. The first was to force “black money” back into the formal system. The second was to filter our counterfeit notes, and the last to cut off terrorist funding. In November 2016, the total currency in circulation was Rs 17.97 lakh crores, 86 per cent of which was in Rs 500 and Rs 1,000 notes.
It was hailed by the government’s drumbeaters as a stroke of Prime Minister Modi’s genius that would result in a bonanza of Rs 3-4 lakh crores to the RBI. The government’s propaganda machine even showed clips of old notes being dumped in rivers and wells. The picture being painted was of the corrupt and tax-evaders being scared out of their wits and just dumping the cash. But the people of India are made of sterner stuff, and today 99.3 per cent of the extinguished cash has come back to the RBI and it is still counting.
In 2016 there was indeed a problem with counterfeits. In 2014-15 these rose by 22 per cent to almost six lakh pieces. In 2015-16, of the counterfeits detected, 415 were in Rs 500s, 35 per cent in Rs 100s and the rest in 1,000s. These are notes in flow, and the assumption was an equal number was sitting in dormant stock. Consider this against the fact that in April last year there were 1,646 crores of Rs 500s and 1,642 crores of Rs 100s in circulation. They were still small change, not distorting the system by much. A better way could have been found to filter them out by an orderly exchange of high-value notes.
And as for terrorism in Kashmir and Naxalism in central and eastern India, there is no hard evidence of such activities abating. Now the government has let us know that the “cancer” has spread to urban areas and “Urban Maoists” were planning to buy 400,000 under-the-barrel grenade launchers. Clearly, imaginations are running riot or the problems have become bigger. It is more likely the former.
By taking out that much money from the market, Narendra Modi inflicted a huge pain on an economy where 98 per cent of all transactions, accounting for 68 per cent of the value, are in cash. At any given time about 150 million workers in the informal sector are daily wage earners and are still paid in cash. With the abrupt sucking out of 86 per cent of the cash, it was this cohort who bore the brunt of the assault. The vacuuming of the cash led to huge job losses and tens of millions just went back to their villages. The economic costs have been estimated to be at least Rs 225,000 crores, or 1.5 per cent of GDP that year. But let us look at some official data to understand the huge cost inflicted.
In the past few days, government spokesmen and their phalanx of increasingly desperate drumbeaters in the media have been exulting over Q2 GDP growth having touched 8.2 per cent. The Q2 quarter is always the high GDP growth quarter. This is mostly because government and private expenditures are rushed through to beat the year-ending closure of the books. The Q2 growth in 2015 was 8.4 per cent. The Q2 growth in 2016 was 8.1 per cent. As a matter of fact, Q1 2016 clocked 9.1 per cent, suggesting that we were heading north that year. Following the self-inflicted injury of demonetisation, Q2 growth in 2017 plummeted to 5.6 per cent. Now Q2 2018 growth has clawed back to 8.2 per cent.
It just means we have resumed on the old track and that lost a year and at least Rs 225,000 crores on a harebrained diversion. Some economists, Dr Manmohan Singh being notable among them, actually estimate the net loss in the year that followed to be around two per cent of GDP, taking it closer to Rs 300,000 crores.
The physical and mental anguish to the 150 million daily wage families can never be measured. How can you measure the pain of hungry children and agonised parents? But there are other costs that can be quantified. It is estimated that the cost of printing replacement notes, reconfiguring the ATMs and the logistics of rushing through the printing of new notes and transporting them to the banks was around Rs 40,000 crores. In recent days, there have been some reports emanating from China that a good quantity of the new Rs 2,000 notes were printed in Chinese security presses on a job-work basis. Since counterfeiting was supposedly a major concern of the suspicious minds in the Prime Minister’s Office, the cost of this is yet to be estimated or felt.
The question that should matter most now is whether the incidence of “black money” in our economy has come down. Sure, income-tax collections have spiked a bit. But that is mostly because of the back pay and new pay due to the generosity of the Seventh Pay Commission that gave 2.35 crore government employees a 24 per cent across-the-board hike. All government employees are now in the tax-paying bracket.
The number of IT returns had been growing at a good pace since 2010. Following demonetisation in November 2016, the returns filed for 2017-18 increased by 99.49 lakhs to 6.84 crore taxpayers. This was 16.3 per cent more than the addition of 85.52 lakhs returns filed in 2016-17.
This is quite logical considering that the economy has been growing by about seven per cent for many years and that, according to Oxfam’s estimates, 73 per cent of the growth has been accumulating with the top one per cent. It is also known that this one per cent also accounts for 58 per cent of India’s wealth. So why should it come as a surprise that the number of taxpayers too has been increasing?
Finally, the big question that still remains, is why did the government go after the cash component of “black money” when it only accounts for about five per cent of total tax-evaded income. The rest is held in cash abroad, in land and property, jewellery and gold. Unearthing this will take some doing, and in doing so the officialdom and its political masters will only generate more “black money.” And consider this — as much as 55 per cent of the FDI investment coming in (about $44 billon last year) is actually Indian-owned money round-tripping its way back from the economy it fled from. Is the government now going the look at this gift horse in the mouth, by asking these ECBs (external commercial borrowings) to declare their origins?
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