Six years after Prime Minister Narendra Modi’s demonetisation experiment, some commentators and economists are now citing strong growth in Goods & Services Tax (GST) collections to claim that demonetisation was a success, or at least not the disaster it was purported to be. Apparently, 23 quarters after demonetisation, last quarter’s strong GST collections are evidence of increasing formalisation of India’s economy and hence, the fulfilment of demonetisation’s stated goals. This is as bizarre as former US President Donald Trump claiming in November 2018 that since it was among the coldest months on record in America, global warming and climate change are a hoax.
Modi’s cherished objective of demonetisation was the elimination of black money. While black money is a colloquial term with no precise definition, it is generally acknowledged as untaxed money. Such unaccounted money is typically used to buy real estate, gold, luxury goods, etc. and only a very small fraction is stored as cash. If there is a reduction in overall black money in the economy, it should logically be reflected as higher tax collections. Black money may be routed as income or consumption expenditure or as business loans. Regardless, for the economy as a whole, a large-scale reduction in black money will be seen through higher direct or indirect taxes at either the state or the federal level.
In 2010, for every Rs 100 of India’s economic output (GDP), Rs 16 was collected in all forms of taxes (direct and indirect) by Union and state governments combined. More than a decade later and despite demonetisation, India’s overall taxes to GDP is still 16 per cent. That is, the taxed portion of India’s economic activity remains the same, before and after demonetisation. If demonetisation has indeed reduced black money and increased formalisation, why is it that as a nation we are still collecting the same share of taxes as we did a decade back?
In fact, in the previous decade from 2000 to 2010, India’s overall tax to GDP grew from 14 per cent to 16 per cent with no overt measures to eliminate black money and force formalisation of the economy. Claiming victory for demonetisation after six years by cherry-picking growth rates of GST collections in a post-pandemic year is both duplicitous and inane.
Even if tax collections have not increased, has the total amount of cash used in the economy reduced post-demonetisation? No. The total amount of currency in circulation is now at its highest level of 14 per cent, compared to 12 per cent in 2010. It is true that currency levels dropped significantly in the year of and immediately after demonetisation, but they bounced back soon to all-time high levels, even before the pandemic. India’s use of cash, at 14 per cent of GDP, is among the highest of all major economies compared to 3 per cent for developed nations and 5-7 per cent for developing nations like Bangladesh and Indonesia. If Modi thought that eliminating nearly all currency overnight would reduce and discourage the use of cash, he has been proven utterly wrong.
If cash levels have increased, what can explain the rapid growth in UPI payments? Again, this is a sleight of narrative. RBI data shows that overall digital payments, which include inter-bank transfers such as RTGS, NEFT, IMPS, credit cards, debit cards and UPI grew at similar levels before and after demonetisation. Before demonetisation, RTGS and NEFT accounted for 98 per cent of all such digital payments, which has now reduced to 90 per cent while UPI has increased from zero to 5 per cent. To claim that demonetisation spurred India’s big shift to digital payments by citing only the growth in UPI transactions is disingenuous. The overall shift to digital payments continues at roughly the same pace as it did before demonetisation, with only the channels changing rapidly.
Modi also claimed that demonetisation would eliminate counterfeit currency. A currency can be confirmed as counterfeit only when it is transacted and ultimately detected as fake by a recognised institution such as a bank or the RBI. Such detected fake currency was only 0.002 per cent of the total value. Even if we assume that the amount of undetected fake currency was a thousand times more than the detected, it would still amount to only 2 per cent of the overall currency. Eliminating 86 per cent of all currency to catch 2 per cent of fake currency would be “Tughluqian”.
More ludicrous are recent claims by noted commentators that demonetisation did not negatively impact India’s economy much because GDP grew by 8.3 per cent in FY2017. Demonetisation was announced in the middle of the third quarter of FY2017. Sure enough, real GDP growth declined in the immediate fourth quarter to 6.3 per cent from 9.1 per cent the previous year. And in FY2018, GDP growth fell sharply from 8.3 per cent to 6.8 per cent. There was an economic output loss of nearly Rs 2 lakh crore in the year post-demonetisation. One has to be either willfully ignorant or intellectually dishonest or angling for a job in the Modi government to claim demonetisation did not impact GDP growth.
The surest sign that demonetisation was an ill-thought and completely botched idea right from the get-go was Modi’s uncharacteristically panic-stricken speech exactly five days after demonetisation, pleading for time to bring back all the black money, failing which he asked to be punished. No patriotic Indian will want to punish or cause harm to their prime minister regardless of how grave their mistakes are. But it is also an affront to a billion Indians and a disgrace to sing demonetisation paeans after all the wreckage and pain it has caused. It is best that we as a society acknowledge that demonetisation was independent India’s greatest economic folly and put the issue to rest.
Chakravarty is chairman of Data Analytics of the Congress Party and a former think tank scholar
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