In his 8 February Rajya Sabha address, Prime Minister Narendra Modi spoke at some length about his note ban decision. He criticised economists who took an unfavourable stance on it, and said that the parameters they used to denounce it were unsuitable for the purpose of a true assessment.
The natural question arises: What exactly are the correct parameters and who is qualified to judge whether the decision has been successful or not?
On various television channels and newspapers, many financial experts have declared demonetisation a success on the basis of different criteria. Some argued that it would lead to a substantial rise in tax revenues and widening of tax base. Others hold that it will result in reduction in real estate prices (Economic Survey 2016-17).
Economists Decry Hasty Implementation
Some experts have written entire books advocating a cashless economy. Two internationally renowned economists, Peter Sands and Kenneth Rogoff, have in the past supported exactly the kind of plan PM Modi effected on 8 November 2016 in India. It is the opinion of these Harvard economists, then, that PM Modi found himself in agreement with when he decided to demonetise Rs 500 and Rs 1,000 notes.
Since then, however, both Sands and Rogoff have written about the disastrous haste and unpreparedness with which the Indian government implemented note ban. This mismanagement, the economists hold, is sure to throw the economy into disorder.
Sands has also questioned the logic behind demonetising notes of such little value. In his previous publications, he has argued that the only way to implement note ban without throwing the economy into a disarray is by demonetising currency higher than $50 (INR 3,000).
Rogoff has argued that the only way to go about demonetisation in a modern industrial nation like India is by taking baby steps. Sudden sweeping changes are more likely to cause harm than spread benefits.
The Indian government, of course, has taken the exact opposite route. The value of the highest note to be decommissioned is just $15 and Prime Minister Modi gave Indian citizens merely 4 hours’ notice before setting the process in motion.
We believe that the same criteria should be used to judge the efficacy of the note ban that was provided as its raison d'être by the central government.
The three reasons provided by the centre were: To remove corruption; stop circulation of fake currency; and destroy terror funding at its root. Let us now see exactly how many of these goals were met.
Demonetisation Spawned Its Own Black Money
Corruption functions in complex ways. The government seemed to believe that a note ban alone would destroy the black economy. But only 2.3-5.6 percent of black money is kept as cash. This means that note ban is effectively useless when it comes to combating corruption. How does the government hope to address this problem?
Demonetisation has spawned its own black economy, where the old 500 and 1,000 rupee notes are being exchanged for 100, 50, and 10 rupee ones. An NIPFP report claims that cash is the least preferred instrument when it comes to storing unaccounted wealth.
Even if we go along with the government’s assumption that there is a lot of black money stored as cash, has demonetisation been effective in tackling this issue? Recently, a few ministers from the BJP were caught with black money in new currency notes. Raids upon bank workers and RBI officers too have yielded bundles of new currency notes that are unaccounted for. It is clear that the problem of black money runs deep and is not going to stop anytime soon. Note ban seems to have had little to no effect on this menace.
Fake Notes: Killing a Fly With a Cannonball?
The second goal was to eradicate the problem of counterfeit currency. To see how demonetisation has affected that, let us look at some figures provided by the RBI.
Of the 90.26 billion Indian currency notes in circulation in 2015-2016, only 0.63 million were detected as fake. This means that a mere 0.0007 percent of the total cash in circulation in the economy is fake. The value of these fake notes in 2015-16 was Rs 29.64 crore, which is 0.0018 percent of the Rs 16.41 lakh crore currency in circulation. This means that the government essentially threw our economy into chaos for nothing.
Rs 500 and Rs 1,000 rupee notes – which account for 85 percent of the value of notes in circulation – were decommissioned to chase a negligible amount of fake currency. This is worrying because who knows what other rash, thoughtless decision this government might take in the future based on erroneous assumptions?
But even if we were to consider the destruction of a tiny amount of fake currency as a worthy goal that merits a bold decision like demonetisation, the fact remains that countless newspaper reports show that fake new currency notes have cropped up everywhere since the note ban announcement. The RBI has been quick to distance itself from this event and declines all responsibility for it. It holds that this has been caused by time constraints as well as a huge, unmet demand for new currency.
A fake 2,000 rupee note was seized merely a day after it was introduced. Rs 42 lakh worth of new currency notes were seized in Punjab. In Hyderabad, some people have even gone to the lengths of arranging their own currency printing machines. Note ban clearly failed to meet another avowed goal.
Terror Funding Will be Back in Action
As for its third goal of destroying terror funding, demonetisation alone isn’t enough. Terror groups finance their operations and move money through several parties. By taking certain notes out of circulation, their activities can be halted only temporarily. They will soon be back in action as new currency notes become available.
Both economists and the Indian government understand that where terror funding is concerned, demonetisation is only a temporary fix. India needs better counter-terrorism rather than currency crackdown to deal with organised attacks.
Indian security agencies are well aware that the 26/11 attackers used credit cards, not cash. This is further proof that changing the legal tender status of certain notes is not enough to combat terror. Terror outfits are in cahoots with other illegal operations. The sale of pornographic material, drug trafficking, and film piracy are some sources of finance for them.
The note ban decision was a political one. It did have some social and economic benefits but on the whole, the damage outstrips the positives. India’s youth are eager for the promised ‘achhe din’. With the way this government is running, it seems that they will have to wait a long while yet.
(Prakhar Mishra is a Chevening scholar at the University of Oxford. Richa Roy is studying public policy at the University of Oxford. The views expressed in the article above are those of the writers. The Quint neither endorses nor is responsible for the same.)
This piece was originally published in Quint Hindi.
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