01 September 2017 07:17:46 IST

Demonetisation: Was it worth the trouble?

Astonishingly, the Modi government’s biggest policy debacle will scarcely dent its image

Nearly nine months after Prime Minister Narendra Modi made his momentous decision to scrap old ₹500 and ₹1,000 notes and introduced new ₹500 and ₹2000 ones, the Reserve Bank of India has finally said that ₹15.28 lakh crore was returned to it. This translates to 98.96 per cent of the withdrawn currency returning to the system.

This implies that either people holding black money were able to ‘work’ the system and funnel their ill gotten wealth back into it or that bulk of the black money was not held in cash as assumed by the government.

Though the RBI took an inexorably long time in declaring this figure, denting its image in the process, the number itself should come as no big surprise for us. From November 8 to December 31, the RBI used to give regular updates on the money returning to banks but it stopped abruptly after that.

The government had initially said that ₹3-4 lakh crore of the high-value currency would be extinguished, cleansing the system of that much black money. This was even stated by the Attorney General Mukul Rohatgi in the Supreme Court. The government was hoping to earn a ‘windfall’ as this ‘extinguished’ currency was supposed to be returned by the RBI to the government.

There were rather fanciful articles in newspapers that suggested this sum could be used for the welfare of the people. Some even said that the ‘extinguished’ sum could be returned to the poor by depositing a specific sum in their Jan Dhan accounts. The symbolism of the government returning to the poor the ill-gotten wealth of the corrupt could not be missed.

Change in narrative

Since the RBI’s announcement on Wednesday, the government’s spin on this has been interesting. The narrative surrounding demonetisation started shifting in December 2016 itself, barely a month after its announcement. Once the government started realising that most of the scrapped high-value currency would come back into the system it started saying that the motive of the mammoth exercise was to get Indians off the habit of holding cash and move towards digital payments. Digital nirvana, according to the government, was just around the corner.

Combating terror funding and stamping out counterfeit currency were also among the original objectives. The Finance Ministry on Thursday put on a brave face with the Department of Economic Affairs Secretary Subhash Garg asserting fake currency was rooted out of the system. But more data would be needed to confirm this assertion.

Finance Minister Arun Jaitley seems rather sanguine about almost 99 per cent of the money returning to the system. Putting a positive spin on it, he said demonetisation has ended the ‘anonymity of cash’ and added, for good measure, that questioning the RBI’s cost in printing new currency was taking a ‘very narrow’ view of demonetisation.

Power Minister Piyush Goyal went a step further, pointing out that 99 per cent of the scrapped notes returning was a ‘great endorsement’ of the success of demonetisation. He even took a dig at the Congress, saying that it “cannot understand a simple thing that money coming into the bank will help spur the economy and will pay back”.

Weight of bad debts

Some commentators have argued that 99 per cent of the money coming back into the system was not such a bad thing as banks, flush with funds, can go about lending them, boosting investment and spurring the economy. This is unlikely to happen given how banks, especially ones in the public sector, are groaning under the weight of bad debts.

According to the RBI’s annual report released on Wednesday, the central bank spent ₹7,965 crore in printing new ₹500 and ₹2,000 currency notes, double what it spent the previous year.

Perhaps the only positive fallout of the note ban exercise have been the surging tax collections.

Costs and benefits

The Opposition politicians were typically acerbic in their comments. Former Finance Minister P Chidambaram said economists who recommended demonetisation deserved the ‘Nobel Prize’. West Bengal Chief Minister Mamata Bannerjee called demonetisation a ‘big scam’ and CPI (M) leader Sitaram Yechury said, “the poor suffered the most. All this for what?”

Even regarding the digitisation drive, after the initial spurt in digital payments, they actually ended up falling once the currency situation stabilised, as shown by RBI data.

So despite the changing of goal-posts regarding the note ban’s objectives, it is clear that the government’s demonetisation drive was not a success or, at the very least, not to the extent expected. When one balances the ‘costs’ — severe disruption in the economy, job losses, impact on farm operations and procurement — demonetisation was certainly not worth the effort.

But this is unlikely to impact the government politically. Modi and Amit Shah have been on a high, especially after the string of Assembly election victories early this year. Nitish Kumar returning to the NDA fold added another feather to Shah’s cap.

Astonishing as it seems, the Modi government’s biggest policy debacle will scarcely dent its image.