Demonetisation is Dead, Long Live Demonetisation

For a government sincere about tracking down unaccounted for wealth, demonetisation remains a policy opportunity.

Making a living out of reading tea leaves has become a full-fledged profession today – stay alert for a number that supports an argument, wait for a new report or data, seek that number out and resuscitate a narrative. This practice of looking for a particular piece of data, presenting it as new data or ‘news’, and then holding forth on a favourite stance is being passed off as new analysis.

Using Reserve Bank of India’s 2017-18 Annual Report, these oracles of policy are reading into the tea leaves of demonetisation, all of them reaching the same conclusion – that demonetisation has failed – and dancing to the tune of that failure in their economic echo chambers, with willing political victims clapping to the beat.

Micro Changes in Macro Numbers

Is demonetisation a failure because 99.3 percent of the Rs 500 and Rs 1,000 notes that were demonetised on 8 November 2016 have returned, as the RBI report, released today states? Here’s a little perspective then: exactly a year ago, a 30 August 2017 press release had already revealed that 98.96 percent of the notes had returned to banks.

The real ‘news’ is that in the past 12 months, about 0.3 percent of the demonetised notes have been either counted or discovered. There is little new and definitely nothing newsy in this number.

Clutching at the remnants of a fading memory in a political run-up to 2019 elections is not analysis; it is narrative building. Or perhaps it’s to do with being economically illiterate.

Micro changes in macro numbers is not uncommon in economics, not in India, not in rest of the world. The budget document alone has three sets of numbers – ‘budget estimates’, ‘revised estimates’ and ‘actuals’.

Our gross domestic product (GDP) numbers are periodically updated – they are released as ‘estimates’ and then ‘revised’. The index of industrial production (IIP) is released as ‘quick estimates’. National income comes out as ‘provisional estimates’.

In the case of banknotes that have returned, I would put this statistically insignificant change under the same set of assumptions – you go ahead with a provisional number till you get a precise one. To extrapolate this differential may offer a good headline for those invested in the idea of a ‘failed demonetisation’ but to saner minds it means nothing. With this, I hope the numerical controversy is put to an end.

The Fault in Government’s PR

Let us now revisit the policy decision of demonetisation. Arguably, Prime Minister Narendra Modi’s most disruptive policy so far, the suddenness of ending Rs 500 and Rs 1,000 notes as legal tender in a space of a few hours to the midnight of 8 November 2016 shocked India’s economic system.

This was a hydra-headed policy with several political expectations, from ending black money and curbing fake currency notes, to controlling terror financing across the border.

The individual distress that followed this policy was widely reported. But from Modi’s speech and an RBI press release announcing demonetisation to a 30 December 2016 Ordinance and finally the 27 February 2017 Specified Bank Notes (Cessation of Liabilities) Act enacted by Parliament, the idea of demonetisation as a black money clean-up was, and still remains, just that – an idea.

Making matters worse was the public relations machinery of the government that – if not confusing – was definitely exasperating.

Demonetisation hit real estate – the PR machinery said black money is gone. It slowed growth, the spin doctors said this was temporary, and to its credit, it was. It reduced demand, disrupted supply chains, increased uncertainty in the system – they said it was expected and will go away.

It caused a decline in cash-sensitive stock-market sectoral indices such as realty, fast-moving consumer goods and automobiles, and particularly hurt the informal, cash-driven economy – they were labelled short-term sacrifices.

Unfortunately, despite a large number of people supporting the decision through the distress, there is no evidence of destruction of unaccounted for money, reduction in bribery or fall in the number of counterfeit notes.

The Under-Reported Data and Policy Opportunity

That said, what has gone under-reported is that the income tax department conducted search actions on 900 groups in which undisclosed income of Rs 16,398 crore was admitted, while survey actions were conducted in 8,239 cases in which undisclosed income of Rs 6,746 crore was detected. More than 400 cases were referred to the Enforcement Directorate (ED) that arrested 18 evaders, while the Central Bureau of Investigation (CBI) arrested 38 people – insignificant numbers, but definitely a beginning.

Further, under ‘Operation Clean Money’, more than 60,000 people, including 1,300 high-risk persons, have been identified for investigation into claims of excessive cash sales during the demonetisation period, while more than 6,000 transactions of high value property purchase and 6,600 cases of outward remittances shall be subjected to detailed investigations. We wait.

While Modi’s was not the first attempt to use demonetisation to curb unaccounted-for money – four decades ago, on 30 March 1978, Parliament had enacted the High Denomination Bank Notes (Demonetisation) Act, a retrospective law that came into force more than two months earlier, on 16 January 1978, under which high-denomination notes of Rs 1,000, Rs 5,000 and Rs 10,000 ceased to be legal tender –there is a policy-execution gold mine ahead.

Today, there is only one door through which money can enter India’s banking system. That door is called KYC (know your customer). Unlike in the past, the banking system knows who is depositing the money and through a network of interlinked data pipelines, that person can be tracked down, the incomes and deposits mapped, discrepancies discovered, investigations initiated, and if found guilty action taken.

For a government sincere about tracking down unaccounted for income and wealth, demonetisation and its big data remains a policy opportunity. Whether this government follows it through or leaves it for the next government to figure it out remains to be seen. Until then, analysts need to read more than mere tea leaves to figure the nuances of this policy.

(Gautam Chikermane is Vice President of Observer Research Foundation and author of 70 Policies that Shaped India. He can be reached @gchikermane. The opinions expressed are author’s own. The Quint neither endorses nor is responsible for them.)