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Demonetisation: How PM Modi's 'surgical strike' on black money turned out to be a disaster

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Kamal Mitra Chenoy
Kamal Mitra ChenoyJun 28, 2017 | 20:47

Demonetisation: How PM Modi's 'surgical strike' on black money turned out to be a disaster

In the early stages of demonetisation, PM Narendra Modi made incredible promises which are worth remembering. He said he would expose all black money which none of his predecessors had done in the past 70 years. The fact that this would include former PM Atal Bihari Vajpayee, and both Vajpayee and LK Advani earlier in the Janata Party regime, was glossed over.

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He had asked for months to clean the Augean stables of black and counterfeit currency (first, he asked for a period of 50 days after November 8, 2016, to clean up the economy). That period has passed. No deadlines have been projected by PM Modi now, though he has shifted everybody's attention to GST, already unpopular with the markets.

There is no indication that black money has significantly diminished. No figures have been given by the RBI despite a Parliamentary Committee — probing the government's decision to scrap high-value bank notes — waiting in vain for RBI governor Urjit Patel to provide estimates of the black money deposited in the RBI. This silence indicates that the Union government does not have much to say now.

Secondly, the government claimed it would seize counterfeit money, as also high value currency (Rs500, Rs1,000 notes) used by terrorists. But terrorists were found with the high-value notes, and even counterfeit notes. Another promise unachievable!

Then simple arithmetic based on the latest RBI Weekly Statistical Supplement of June 9, 2017, reports that currency  notes declined from Rs 17.9 lakh crore on November 8, 2016, to Rs 14.7 lakh crore on June 2, 2017.

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During the same period, the total deposits of banks with the RBI and under the market stabilisation scheme increased by RS 2.31 lakh crore and Rs 0.947 lakh crore, a total of Rs 3.25 lakh crore on accounts of deposits of demonetised bank notes. If these two figures are added: Rs 14.7 lakh crore and Rs 3.25 lakh crore, this would amount to a total of Rs 17.95 lakh crore as against Rs 17.9 lakh crore on November 8, 2016.

In other words all the demonetised currency has come back into the system.

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So, there is little black or counterfeit money exposed, and thus demonetisation, for all the tall claims and all the suffering, is largely shadow-boxing with untenable claims of success.

Despite PM Modi’s fervent speeches, according to no less than the RBI, the demonetisation experiment largely turned out to be a hoax. Most of the media went along. But worse is yet to come.

In this column, Harish Damodaran shows that the prices of various crops have fallen significantly, and the simultaneous fall of prices of some products is unprecedented. This phenomena was widespread, especially in Madhya Pradesh, where because of a glut in the markets for some crops, the farmers suffered low returns. And thus their widespread anger against the Madhya Pradesh government.

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This post-harvest disaster is also a outcome of demonetisation because cash-based transactions/contracts could not be concluded because of shortage of cash flows.

So, two years of drought have been followed by a good harvest, but poor price realisation because of three consecutive years of depressed incomes. The agricultural distress and the consequent anger of the peasantry, has led to a host of loan waivers by state governments.

But as The Economist pointed out in mid-May 2017, it was very unlikely for states to bear the fiscal burden. It believes that this would be ultimately ruinous to the Indian economy. The sharp increase in crop loan waivers will hit public investment quite substantially, putting further pressure on the economy.

The GST, which is seen as a radical transformation of the taxation system, is also questionable. Online stocks are being sold with large, even unprecedented cuts in prices. Almost all traders are trying to get rid of all existing stocks. The controversial GST, may lead to more income for the states and Union government, but relatively little will accrue to the public exchequer.

To sum up, demonetisation turned out to be a disaster, as even the foreign economic press pointed out, despite the political rhetoric and the media buzz, which knew it to be a disaster as all serious economists and the financial press know.

The Central Statistics Office (CSO) statistics show that at 2011-12 base prices, in the first quarter of January 2017-March 2017, the gross domestic product (GDP) has fallen compared to the previous quarter, as has gross value of output (GVO); and the trade deficit (difference between exports and imports) has increased very substantially.

The Indian economy is in troubled waters.

Last updated: June 28, 2017 | 20:47
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