Union minister Ravi Shankar Prasad could see the success of the demonetisation thrust on India by the Narendra Modi government in the decline of prostitution. Whoa, what an intellectual observation by a legal luminary of Prasad’s stature, as if India’s economy is thriving on sex tourism.
“Flesh trade has nosedived in India,” the law minister told reporters on November 7, 2017, according to a PTI report. His statement carried by all newspapers dutifully read: “Trafficking of women and girls has gone down considerably. A huge amount of cash used to flow to Nepal and Bangladesh...Notes of Rs 500 and Rs 1,000 were used to make payments in the flesh trade, which has now come down.”
While the BJP and Modi fans have been eulogising the move as the most successful step, describing it as a radical economic and structural reform, their detractors and Modi-baiters depict it as a total disaster that shook the country’s basic economy.
It may not be as dark as the critics portrayed it. But surely, it is not as rosy a picture or a bright or right decision as claimed by the chest-thumping supporters of Modi. The rhetoric was exposed, as demonetisation was tall on claims but short on substance. For now, it seems to be a waste of time and a lot of money (If the GDP dip is factored in at Rs 2.25 lakh crore, the loss of money is put at Rs 2.50 lakh crore.)
Modi’s Nov 8 announcement
The sudden announcement, which ought to have been the job of banking regulator, the Reserve Bank of India (RBI), which decides how much money is required to be in circulation and in what form, by the Prime Minister was welcomed by all initially as the move was sugarcoated as the one intended at eradicating black money, and rooting out terror financing.
On this day last year, at 8 pm, Narendra Modi appeared on the TV. After the formality of hoping that the denizens of India had enjoyed a great Diwali, he began speaking about BRICS countries, his government’s initiatives, economic growth in the previous regimes, the growth of the “spectre of corruption and black money”, their debilitating effect on the nation’s economy, terror funding and somewhere in between lobbed a bombshell.
“Brothers and sisters,
“To break the grip of corruption and black money, we have decided that the five hundred rupee and thousand rupee currency notes presently in use will no longer be legal tender from midnight tonight, that is 8th November 2016. This means that these notes will not be acceptable for transactions from midnight onwards. The five hundred and thousand rupee notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper. The rights and the interests of honest, hard-working people will be fully protected. Let me assure you that notes of one hundred, fifty, twenty, ten, five, two and one rupee and all coins will remain legal tender and will not be affected.”
India was stunned. Thanks to the amplified narratives, people broke into hysteric jingoism. Critics typically began being skeptical. Nobody has an iota of idea about the ramifications.
First reaction from people was to queue up in front of Automated Teller Machines (ATMs) of various banks to draw their own money with limitations imposed by the government. Then, serpentine queues began to form in front of banks. First three weeks, Indians fought amongst themselves. It was a warlike situation in front of every bank. Videos of physical brawls, with men and women clenching their fists and delivering body blows and punches in stomachs, and some scenes of street wrestling and street boxing, went viral shaming India. The denouement of economic soap opera had resulted in bleeding noses, heart attacks in queues and some unfortunate deaths too. Who would compensate the loss of lives and also dignity? Most ATMs went defunct.
This unprecedented and forced standing in queues till late into the night went on for close to three months or more. India was standing in queue.
Unfortunately, all those who were targeted through demonetisation, like terrorists and the rich possessing black money – including industrialists, politicians, affluent classes -- were not found in the queues anywhere. Not even once and not even for a second.
Remonetisation with notes of Rs 2,000 and Rs. 500 in a different design surely has brought the situation back to normal. But not before the rural stress forcing loan waivers to the tune of Rs. 88,000 crore.
It’s only a fortnight ago that the government announced a Rs 9 lakh crore stimulus, including massive road construction and recapitalisation of banks (to the tune of Rs 2.11 lakh crore). What has triggered this decision? Demonetisation surely has its role in forcing the government to take such a decision to announce a stimulus.
Divided opinion on DeMo
The jingoistic observance of “Anti-Black Money Day” indeed impales the shallowness of the tall claims of the ministers, including finance minister Arun Jaitley, who tried to argue that demonetisation could not be seen in isolation, but it should be seen through the big picture of the various other economic initiatives of the Modi regime, including Goods & Services Tax, the demonetisation has vertically divided the intelligentsia of the country.
The tax receipts increased, the number of IT returns increased, tax base widened and all other such announcements by Arun Jaitley, who got an opportunity to give a response to his predecessor P Chidambaram, who tore into the claims of the government a few minutes earlier on an India Today TV debate in the night of November 7, 2017, was no more than a jargon.
Chidambaram gave a minus 10 out of 10 to demonetisation and called it a ridiculous move.
Former Prime Minister Manmohan Singh described it as an “organised loot” and “legalised plunder”. A world-class economist that he is, Singh chose the electioneering platform in Modi’s home turf, Gujarat – He addressed the “so-called BJP vote bank” of traders and businessmen in Ahmedabad – to pack the punches on his successor. “Nowhere in the world has any nation taken such a drastic step that swept off 86% of currency,” he pointed out.
Tax base widened, so what?
The government began talking about spurt in number of returns after demonetization. There is a consistent rise in tax collected and number of taxpayers year on year for several years now. There is a ballpark rise of 50-lakh assessees, including individuals, since 2012-13 Assessment Year (2011-12 Financial Year) annually. You may see this working paper issued by the Central Board of Direct Taxes last year.
Even the tax to GDP ratio is increasing.
But post-demonetisation, the country’s GDP plummeted. The government also changed the formula to calculate the GDP and the analysts were vocal about it too. The dip in growth rate of GDP in the April-June quarter that plummeted to 5.7, was NDA-II’s career’s lowest.
While notes worth Rs. 15.44 lakh crore were demonetized, notes worth Rs. 15.28 lakh crore were deposited into the banking system. Thus, the demonetized money returned to banks. The government’s stand that this would not absolve the hoarders of black money of their guilt doesn’t cut much ice. For, while accepting the deposits, the bankers had insisted that the depositors explain the source of the money.
Route of black money into India
And, as Mohan Guruswamy, former economic advisor to Prime Minister Atal Bihari Vajpayee, consistently argued, why would the hoarders stack the money in India in liquid form. Half of such cash would be invested in property, and 44 to 46% would have been converted into gold. Only, a niggardly 4-6% would have been in the form of cash.
Aside from this, the money that was parked in multiple forms outside India was coming back in the form of Foreign Direct Investments (FDIs) as the black money hoarders were round-tripping the same. At least 55% of the FDI, or USD 44 billion, was that kind of money, felt Guruswamy.
The estimated job losses due to demonetisation were put at 1.50 million by Centre for Monitoring Indian Economy between January and April 2017. See the report here.
The government wanted to foster the growth of use of digital currency through DeMo. Too many apps like BHIM, UPI, PayZapp, PhonePe -- huh, the list is long -- have confused the common man, who always paid in cash. The predicament of the large unorganized sector has never been factored in by the government while taking up the so-called structural reforms.
To conclude with an anecdote: A domestic help came and emphatically asserted to a person: “Sir, even I employ a maid for washing clothes and cleaning utensils. I pay her Rs. 300. I buy oil, vegetables and grocery on a daily or a weekly basis. SO, you MUST pay my monthly wages in cash. Else, I am sorry. I am not coming to work from now.”
And, on November 8, 2017, when I woke up, almost all the eight newspapers I buy carried a jacket advertisement by Paytm, which wanted people to link any of their bank accounts to Paytm and make payments through BHIM and UPI.
And, we all know who has benefitted, only if we don’t deliberately refuse to understand.