Ever since the Reserve Bank of India, in a recent report, said that more than 99 per cent of the scrapped ₹500 and ₹1,000 notes had come back into the banking system, the government has been trying hard to defend its disastrous demonetisation policy. It has long been acknowledged that demonetisation failed to achieve its main objective — extinguishing the extant stock of black money. The RBI report has merely confirmed this. Some of the defenders of the note ban, including the government, claimed that demonetisation led to greater tax compliance — both direct and indirect — and greater formalisation of the economy.
Finance Minister Arun Jaitley said, “The larger purpose of demonetisation was to move India from a tax non-compliant society to a compliant society.” Though there seems to be some evidence pointing towards greater tax compliance post note ban, the Finance Minister is silent about demonetisation’s failure to achieve its main objective of black money eradication.
Bizarre defence
It was also claimed that demonetisation led greater “financialisation” of savings. But as journalist Mihir Sharma points out in his recent Bloomberg column, according to the RBI report net financial savings were 7.1 per cent of disposable income for fiscal 2018, less than the average of five years prior to demonetisation. He says that Indians, post-demonetisation, preferred keeping cash than depositing it in bank accounts.
But among the most bizarre defences of this controversial move came from NITI Aayog Vice-Chairman Rajiv Kumar. He held former RBI Governor Raghuram Rajan responsible for the growth slow-down and not demonetisation. He said Rajan’s diktat to PSU banks to come clean on their bad loans situation led to a credit squeeze that resulted in the slow down. Kumar even blamed Rajan’s stringent norms for asset classification in banks for the rise in non-performing assets (NPAs) or bad loans.
Kumar’s implicit argument that an RBI Governor must not ask banks to stop window dressing their bad loans problem not only beggars belief but also defies economic logic. It was Rajan who red-flagged the bad loans issue, a problem that had been creeping up on the financial system over the last decade. In fact, the current RBI Governor Urjit Patel has made the norms on stressed assets even more stringent. Now, unpaid loans over ₹500 crore have to be resolved within 180 days or else it will have to be referred to the National Company Law Tribunal. Will Kumar rap Patel on his knuckles for choking credit to industry? Kumar’s intemperate remarks have the danger of eroding the credibility of the NITI Aayog — the government’s premier economic think-tank.
Attracting votes
That demonetisation hit GDP growth was something even the Finance Ministry’s Chief Economic Advisor Arvind Subramanian admitted to in 2016-17 Economic Survey. There is evidence of bank credit falling drastically in the months after the note ban which was most likely to be caused by a severe contraction in demand hitting small businesses.
The government may have its political compulsions to defend demonetisation. After all, it seems it put people through a lot of hardship with nothing much to show as tangible results. Though the Opposition parties have been quick to criticise the government’s draconian note ban, it is unlikely that this issue will figure in a major way in next year’s general elections. Indians are usually a forgiving lot and have a short memory.
But what the NDA government will have to worry about, going into next the general elections, is the growing gloom over the present economy. The falling rupee, worsening trade deficit, and rising fuel prices are factors that are slowly pushing the economy towards a situation it was in 2013-14, during the fag end of the UPA rule. Though the recent GDP growth figures bring some succour to the government, there are more worrying signs on the economic front that this government will have to grapple with in the coming months.
In the run-up to the general elections, it will be interesting to see what narrative the government and the Opposition parties spin around the economy to attract votes.