Why there is still no clarity on PM Modi's demonetisation gamble
Has demonetisation, touted as the NDA government’s biggest weapon in its fight against black money, failed to achieve its target? Or, have the ingenuous black money hoarders tricked the banking system to render much of their illegal cash as white?
This was the biggest news in the past week for the economy and spurred a heated debate. More than 21 months after Reserve Bank of India (RBI) withdrew Rs 500 and Rs 1,000 notes from circulation on November 8, 2016, it said on August 29 that nearly all of that money has returned to the banking system. Last year too, the RBI had hinted at this happening, as it said it was still in the process of counting the notes and much of the demonetised currency may have actually returned into the system.
The latest data reveals that the RBI has received Rs 15.31 lakh crore of Rs 500 and Rs 1,000 notes, or 99.3 per cent of the Rs 15.417 lakh crore worth of notes which were in circulation as on November 8, 2016, when the government announced demonetisation, as stated by the central bank in its annual report for 2017-18.
This means that just Rs 10,720 crore of Rs 500 and Rs 1,000 notes failed to come back to the RBI, as against expectations that over Rs 3 lakh crore of black money would not return to the banking system. The money, that was not returned to the banking system, pegged by informal reports to be around Rs 3 lakh crore or even more, was to be used as dividend from the RBI that would fire up infrastructure projects in the country.
Demonetisation led to widespread disruption of the economy and hurt several businesses, especially in the small-scale sector. The sudden withdrawal of notes in 2016 had created a shortage of money, with people waiting in long queues outside banks and ATMs to withdraw from their accounts, that too in a limited manner. The currency ban also scarred the economy, with demand falling, businesses facing one of its worst crises since the global slowdown and GDP growth declining close to 1.5 per cent. Small units were hit hard, with many reporting huge losses even after nine months.
Private investments had been weak anyway, and the note ban only helped worsen it. Investment proposals nearly halved to Rs 1.25 lakh crore in October-December quarter 2016, compared to an average of Rs 2.36 lakh crore in the preceding nine quarters that Modi government has been in power, showed data from the Centre for Monitoring Indian Economy.
The growth of bank credit fell to 5.1 per cent for the fortnight ended December 23, 2016, the lowest in over 60 years, as businesses cut down on borrowing after demand dried up, RBI data showed. In his New Year message to Governors and Lt-Governors, then President Pranab Mukherjee cautioned that demonetisation “may lead to a temporary slowdown of the economy” and called for quick measures that will ease the “suffering of the poor”. Former Prime Minister Manmohan Singh called the move “an organised loot and a legalised plunder”.
The government had its own explanations for demonetisation — from extinguishing black money to battling counterfeit notes to containing terrorism to aiding digitalisation. But the subsequent assembly elections in states like UP showed the public putting its trust behind the narrative that the measure was indeed to hunt down black money.
But with the Lok Sabha elections next years, how will the government explain the return of all the demonetised currency? Or, is it that the government has failed to detect the black component from the white, because people have used banking channels to launder their money?
Serious questions will be asked about the inefficiencies of our banking sector, too.
(Courtesy of Mail Today)