November 8, 2016 – a date which most of India’s current generation will remember at par with August 15, January 26 or October 2. After all, it was the day (or night) which literally shocked the nation of a billion people and created mass hysteria – with the Prime Minister (PM) announcing that the denominations of ₹500 and ₹1000 would no longer be legal tenders.
First things first, it was a move without a historical precedent in India – and even in other parts of the world, such a move has rarely been executed. In fact, this may arguably have been the boldest ever move by a politician – much less by a PM in independent India. Even though demonetisation of Indian currency had earlier been carried out, the enormity and scale of its impact had never been this huge.
It set out to achieve the objectives of an India without corruption, black money, counterfeit currency and terror funding. As these were noble objectives, the move was rightly applauded by many people. And as claimed by the government, the people were ready to accept the narrative of ‘short-term pain and long-term gain’. Back then, the then Attorney General had claimed that it was expected that people would deposit ₹10-11 lakh crores in banks, while the remaining ₹4-5 lakh crores which went into funding terrorist activities would also be neutralised. Supposedly, this should have created a massive windfall gain for the government.
However, the data recently released by the RBI shows that around 99% of the currency has found its way back into the system. Consequently, this has made the government change its goal-posts. Now, it is claiming that the entire exercise was carried out to identify and bring the illegal cash back into the system and help digitisation – which will create an ecosystem of no corruption, because a less-cash system will be easier to track.
As good as these sound, the government hasn’t been able to justify its failure on the part of the windfall gain theory. Subversive activities are continuing, if not rising, in conflict zones. And the very same RBI report busts the claim of demonetisation ‘ending’ the menace of counterfeit currency.
The other pros of demonetisation as previously claimed by the government relates to bringing behavorial changes in people (regarding their spending habits) and the widening of the tax base. The former is only anecdotal and not quantifiable – hence, it doesn’t hold much water. Regarding the latter claim, it is true that the tax base has expanded post-demonetisation – but a deeper analysis reveals that this increase has certainly not been that astounding.
If the process was meant for bringing long-term gains and no short-term benefits, I would like to ask why other long-term measures of sustainable benefits weren’t taken. In my opinion, it would have been much better if ‘institution building’ had been prioritised instead of taking such an ad-hoc measure. Constituting the Lokpal, judicial reforms for the speedy delivery of justice, police reforms (especially making them politically independent), empowerment of the anti-corruption bureau – these measures can go a long way in achieving the goals that demonetisation had set out to achieve.
In the light of these things, it would be pertinent to ask if the PM was right in de-legitimising 86% of the currency in circulation at that time. It resulted in mass havoc – many people died while standing in the queues, the huge informal economy was the hardest-hit, labourers did not get their wages, marriages were postponed and many people committed suicide. Rumours, true or false, were also at all-time high – the new ₹2000 note having an in-built chip to track its location, people burning notes, ‘people throwing their black money into the Ganges’ (the PM in the Ghazipur rally, November 14, 2016), and so on. All these at a time when the economy was beginning to grow.
At this stage, it wouldn’t be wrong of us to demand the PM to take a similar bold decision on banning cash donations to political parties and other organisations, which have also been considered to be the ‘dens of black money’. For someone who could decide on demonetisation, this would be a small measure.