The much-touted masterstroke of PM Modi – demonetisation has mightily fallen short of what it was expected to achieve.
Demonetisation came as a storm to the 1.3 billion Indians. No one expected it. Not many could even comprehend that such a thing could happen. What erupted out of a late evening address to the nation by PM Modi, didn’t just directly affect each and every citizen of the country, for most it has flattered to deceive.
The government thought it took a revolutionary step towards a new, financially stronger and lesser vulnerable economy. But in 2019, the legacy of demonetization in the eyes of the public – lies, disruption, economic strain, and casualties.
Two years on from the fateful fortnight, we take a look at 10 points that stand out to confirm that PM Modi’s massive surgical strike on black market and corruption fell flat on its face.
Our analysis is divided into two parts:
PART 1: The failed objectives and hollow positives that the Government touts came out of demonetisation.
PART 2: The collateral damage that India encountered and still suffers from two years on from demonetisation.
Government’s failed objectives and hollow positives
In this story we address the first part of the objectives and impact touted by the Government to show demonetisation in good light and having achieved its purpose.
1. BLACK MONEY
Surgical strikes against the corrupt – ousting black money that made up 30% of total currency in circulation.
In the months leading up to demonetisation, the Government anticipated that roughly 30% of the currency in circulation was black money. Curbing this ease of corruption was the biggest selling point for the initiative to ban the bigger Rs. 500 and Rs. 1000 notes as legal tender.
A month after in December 2016, the State Bank of India too had claimed that at least 2.5 lakh crore (termed black money) of the total 15.4 lakh crore in circulation will not return to the coffers. However, after a yearlong counting process by the Reserve Bank of India, it was revealed that approximately 15.31 lakh crore (or 99.3%) was back with the RBI.
The number fails government’s main objective for the drastic step with only a mere 16,000 crore not returning from the market. The sheer disparity in the touted black money and the real outcome leaves the finance ministry and Modi government in a precariously embarrassing position.
With 99.3% of the entire currency returning into RBI coffers, most of the black money hoarders seemingly got away.
2. COUNTERFEIT CURRENCY
Curbing the menace of fake notes that enter circulation and cleaning up the economy.
One of the government’s main aims with the demonetisation drive was killing the menace of counterfeit currency. At any given point of time Indian economy sees roughly Rs. 400 crore of counterfeit currency in circulation, which in itself is not a significant number.
Post demonetisation, although the number of counterfeit notes detected has decreased from roughly 7.62 lakhs in 2016-17 to 5.22 lakhs in 2017-18 (down 31.4%), number of counterfeits of the new 2000 and 500 notes has gradually climbed.
In 2017-18, the number of Rs. 2000 counterfeits jumped from 638 pieces detected in the previous year to 17,929. Similarly, Rs. 500 counterfeits saw a rise from 199 in 2016-17 to 9,892 pieces. This tells that the new notes with improved counter-fake printing measures are being replicated at an increasing pace.
Banks detected an all-time high 480 per cent jump in the number of fake currencies transactions. So much so that almost Rs. 11.23 crore of fake currency in new notes was already detected by June 2017. The government’s claim that demonetisation promptly will check the menace falls flat when compared to what has conspired since November 2016.
With a 400% rise in the number of fake new 2000 and 500 notes detected, counterfeit currency network is still very much intact.
3. TERROR FUNDING
Break the back of terror funding by strangling the cross-border black money (hawala) nexus.
India has been at blows with neighbour Pakistan for perpetually all of its independent history. Apart from cross-border terrorism from POK, regions like North East suffer from regular militancy and insurgency.
PM Modi in his speeches had claimed that black money is the biggest weapon for terror, which is true.
But the claim that a step like demonetisation will be able to cure decades of diplomatic failure in ending cross-border militancy was far from effective in the years after.
The demonetisation drive was quickly followed by three terror attacks in Assam (19th Nov ’16); Kashmir (22nd Nov ’16) and Nagrota (29th Nov ’16).
Since then, India has witnessed over 2000 terror-related incidents which have resulted in over 500 deaths. Major incidents like Uri attack and Pulwama blast in Kashmir and the Sukma attack in Chhattisgarh are proofs that demonetisation was unable to break the back of terror, as was exclaimed by PM Modi.
Number of major terror incidents prove that demonetisation failed to choke funding for militant group in and across Indian borders.
4. CASHLESS ECONOMY
Narrative that evolved post demonetisation, as a step backing the Digital India initiative of the Modi Government.
Cashless economy was a vision that came in a little later, touted by PM Modi and his ministers in addresses almost two weeks after the demonetisation drive came into effect. Government officials insists that the objective has been met. But studies show the effects are more temporary.
In a recent Forbes report on an academic collaborative study between NUS Business School, Indian Institute of Management and Hong Kong Baptist University, post demonetisation India saw a dramatic 84% spurt in debit card usage.
There was also a marked shift from cash to cashless transactions post demonetization, with transaction value and volume up by 93% and 84% respectively.
But the first three months of 2017 told a totally different story. The spike in digital transactions in the aftermath of demonetisation declined once cash made its way back to the economy in the form of the new currency.
The numbers still stay far above the initial levels before demonetization but most users seem to have returned to their previous monetary preferences.
Demonetisation did see a spurt on digital payments, but the numbers have declined since as cash made a comeback into the economy.
5. GROWTH IN DIRECT TAX COLLECTION
Narrative with a late entry (1 year after) that demonetisation increased direct tax collection.
In the aftermath of the drive, PM Modi and his ministers are trying to bring out positives to justify the step. Finance Minister Arun Jaitleytook to twitter in 2018 to state that a 18% increase in tax collections from Rs. 3.8 crore to Rs. 8.86 crore in 17-18 was due to the effects of demonetisation.
However, economist like Rupa Subramanya were quick to clear out the flawed narrative. The rate of increase in direct tax collections post the demonetisation drive isn’t a first. The 18% growth rate in direct taxes achieved in 2017-18 was witnessed in 2010-11 too. Fluctuations in tax collections of this quantum are common.
Also notable is that while the numbers spiked in the demonetisation year 2016-17, the growth rate is smoothing out to older levels. So much so as that income tax e-filings took an unprecedented dip in FY2019 by more than 6.6 lakh. This has surprised analysts as the trajectory of tax base was expected to continue upward movement post demonetisation.
The tax collection numbers saw a spurt in the year post demonetisation but the trend has returned to normalcy and event dipped in 2019.
Exaggerations and failed aspirations – Impact of Demonetisation cannot be ignored
With the General Elections underway to form the next government, the battle looks tight but hinges on nationalism and border security. But it would be ill-advised to forget the most important reform of the Modi government in demonetisation and how it has transcended and impacted India’s economy and its citizens.
Years on from now, demonetisation will be remembered as the biggest legacy of the Modi Government. And from what’s conspired till now, the legacy is turning into the blackest blot on PM Modi’s 2014-2019 report card.
*Part 2 of the story will address the collateral damage that India incurred during and in the aftermath of demonetisation. Stay tuned for more insight.