Understanding Demonetisation: Masterstroke or Failure?

On November 9, 2016 - the morning after the announcement of demonetisation of Rs 500 and Rs 1000 currency notes, the Modi Government started feeling the heat of its decision which was called a measure to eradicate circulation of black money in the system.

However, the RBI recently in its report said that 99% of the currency scrapped has been turned in. Which makes demonetisation appear like a massive failure, and the Modi Government is already facing the flak as it failed to extract black money as promised.

Recalling Demonetisation:

The sudden decision to scrap 86% of the currency in circulation received extreme feedback, while some called it a 'masterstroke on black money,' others called it a 'blunder', 'attack on the poor' and 'political gimmick' ahead of the elections.

What followed was a long period of ATMs and Banks running out of cash, serpentine queues outside banks for getting currency notes exchanges, numerous confusing notifications from the RBI regarding last date of exchange for currency notes, to people losing their lives standing in queues and finally resulted in the washout of the Winter Session of the Parliament.

The Opposition slammed the decision and demanded a roll back of the move. Delhi Chief Minister Arvind Kejriwal, West Bengal Chief Minister jointly protested at the Azadpur Mandi in Delhi to demand a roll back and called the move a scam.

The Opposition, along with Congress Vice President Rahul Gandhi protested in the Parliament and demanded answers from the Prime Minister. Rahul Gandhi also called the move an attack on the poor.

Most economists all around slammed the idea and said that the move is going to adversely affect the Indian economy, but the Government stood by its decision. The changing narratives of the Government were also questioned by the Opposition. What began as a measure to curtail circulation of black money became step towards a cashless economy.

The government also said that this move would help fight terrorism in the valley, by cutting off terror funding due to the lack of cash. However, there have been several incidents of terror incidents of terror attacks in the valley post the move.

There were many who pointed out the lack of infrastructure in the country to be able to implement such a move.

The World Bank on Financial Inclusion report 2014, recorded the following in its report:

• India is home to 21 percent of the world's unbanked adults and about two-thirds of South Asia's.
• In India not only is account penetration comparatively low, at 53 percent but so is the use of accounts for payments: a mere 15 percent of adults reported using an account to make or receive payments.
• Only 39 percent of all account holders in India own a debit or automated teller machine (ATM) card, and using an account might be inconvenient and time-consuming if every transaction requires using a bank teller.

Former Prime Minister Manmohan Singh, in one of his speeches in the Parliament, had called the move an 'organised loot and a legalised plunder', after the RBI reports were out, many hailed Singh's prediction, about a 2% drop in the GDP, why happened.

The data released by the Government indeed showed a dip to 5.7% in the April-June quarter 0f Financial Year (FY) 2017-2018, which is very steep if compared to April-June Quarter of the FY 2016-2017 which recorded a GDP growth of 7.1%.

Here is what Singh had said in the Parliament, "I do not disagree with these objectives, but what I do want to point out is that in the process of demonetisation, monumental mismanagement has been undertaken upon which today, there are no two opinions in the country as a whole. Even those who say that this measure will do harm or will cause distress in the short run, but is in the interest of the country in the long run, I am reminded of John Keynes, who once said, "In the long run, we are all dead".

As demonetisation is being attacked and criticised for being unable to extract black money, the Recent World Bank reported held a different view. Here's what the report said:

Demonetisation has potential to bring positive transformation

In the long-term, demonetization has the potential to accelerate the formalization of the economy, leading to higher tax collections, and greater digital financial inclusion provided measures such as increased use of property taxes is taken in the areas of tax policy and administration, and share of the population with access to the internet and digital means of payments are increased. The implementation of the GST could be a key complementary reform that will support formalization, as firms have a strong incentive to register with GST to obtain input tax credits.

RBI says whopping 706% suspicious transactions recorded by banks in 2016-2017 than in 2015-2016

The RBI in its annual report said that the number of suspicious transactions reported by banking companies were 473003, which is 706% more than 106273 as reported in 2014-2015.

With internal reports of the Government saying that the move has also achieved its goal of stopping terror funding, it's only a matter of time now to understand if demonetisation was a 'masterstroke' or 'monumental failure,'

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