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Demonetisation 2016: Taking stock after a year

  The demonetisation initiative by the Government of India in November 2016 came as a surprise. With the note ban in place, the common man faced a lot of difficulties. But how does the situation stand a year later? An analysis.  

Dr Suresh Srinivasan

Exactly a year ago, the Government of India banned rupee notes of 500 and 1,000 denominations. The objective, as officially stated, was to unearth the black money that was being held in the economy, as well as to flush out illegal notes that were being used to fund terrorist groups for anti-national activities.
Widely considered as a bold and adventurous move, demonetisation did have a seriously significant impact on the country’s economy and sentiments all through 2017. Demonetisation was a grave issue and such was the impact that the economic growth for the subsequent three quarters had to bear the brunt of the initiative.

Short term impact
Short term pain points were quite high. A cash crunch hit the economy as it took a while for new notes with denominations `500 and `2,000 to be introduced. The common man suffered in terms of the currency exchange process, and the overall experience was nightmarish, signalling a significant negative sentiment. The Opposition, the press and social media erupted with their own analyses; a lot of criticism came from non-economists weighing in with their opinion. The issue became a convenient topic for public scrutiny and the verdict being passed was that the government could have planned the process much more proactively.
During the crisis period, the usage of plastic money exponentially rose. It was also widely perceived that while demonetisation was painful on one hand, the sudden surge in the usage of credit and debit cards was a blessing in disguise, with more money in the economy being transacted through legal channels.

Achievements
Nine months after the demonetisation, the government announced that the note ban was a success and the entire stock of the banned notes assessed to be floating around in the economy, pegged at around `14 lakh crore, had been deposited back in exchange of new notes. This effectively means that the government now had clearly identified the source relating to such funds and such identities were open for questioning on the legality of such funds, and the status of the payments with respect to the same. On the face of it this, along with the usage of plastic money, is extremely encouraging news and justifies the entire demonetisation saga!
The demonetisation intervention also gained credibility when powerful global agencies like World Bank and International Monetary Fund (IMF) gave a thumbs up for the boldness of the government in implementing the same. Recently, Moody’s, the global rating agency also upgraded India’s sovereign rating to Baa2, the first upgrade in 14 years. The reasons cited for such an upgrade include the successful launch of vital economic reforms including Goods and Services Tax (GST), schemes to address stressed assets and demonetisation. Moody’s clarified that although there are short term pain points, the economy stands quite well positioned for the longer term!

Workarounds?
Negative reports are emerging too. The powerful seem to have indulged in legal conversion of unaccounted cash through various means finding loopholes in the system. The coordination between the Reserve Bank of India (RBI) was questioned and there were discussions as to who was calling the shots, RBI or the government. Critics also questioned if demonetisation was an adventurous cover up for the prime minister’s lack of delivering the aggressive promises he made when coming to power including job creation, make in India, digital India and Swachh Bharat.
So, there are pros and cons which we cannot ignore. All said, has the full potential of such a clean-up initiative been realised? Are there any lessons that have been learnt? Could the process have been planned better? These are the questions that linger, a year after such an economic shock blew away the country!

Information flow
In spite of such a lot of public outcry, the prime minister had stuck to his dictum, and in some sense accepted the shortfalls and the short term blips and pain points. However there could have been some more initiatives to complete the ‘loop’, and inform the common man as to what has been achieved out of this whole intervention. Perhaps a clear message on how this ‘tsunami’ of a reform has panned out? Who are the culprits? How have they been dealt with? What does this hold in the future; how will this minimize shadow transactions and how this can positively impact our economy? It might still be too early for the government to make this pronouncement, and hopefully this will happen soon.

The black money question
In one sense, the reports in the media provide details and extracts of the Income Tax department’s reports that detail the aftermath of demonetisation and the intelligence gained and the tax raids that followed. It seems the government now has clear information on lakhs and lakhs of people who have deposited cash during demonetisation, way beyond their justifiable source of disclosed income. Information now seems to be available on large ‘unaccounted’ cash deposited by businessmen, bullion traders, petrol pump operators and other small and medium sized traders. The government also has unearthed a number of shell companies that have been primarily laundering unaccounted money.
A clear and concise report presented to the public at large, formal or informal, in terms of what was achieved through demonetisation and on the above lines, especially in case of an intervention of such magnitude, could have definitely added value. It is still very surprising as to why this has not been done till now. Is the prime minister holding back some cards to be disclosed closer to the elections? Whatever the case may be, concrete actions nevertheless needs to be taken against the offenders and this is an important piece of information that needs to be shared and percolated in a timely manner. This will is sure to give the public the necessary solace, having encountered the pain points head-on during the initiative.
In summary, the fact remains that the government took a controversial stand by implementing one of the riskiest interventions that any government would dare commit to. Granted, there were certain execution flaws, but still the government managed to make significant accomplishments. Of course there can be much that could have been achieved,
but the very boldness to have done what they did is commendable.