Arun Jaitley may be right. Demonetisation was not a complete disaster
Union finance minister Arun Jaitley, I am sure, knew the inevitable for the last couple of months. That's why his post RBI annual report statement was rehearsed, measured and as always crafted.
Barely two hours ago the RBI annual report 2016-17 had presented the most awaited answer to the longest surviving question in recent times in form of a mere footnote. The central bank had taken almost seven months as well as old and freshly ordered counting machines to find the volume of Rs 500 and Rs 1000 notes that landed up in system after Prime Minister Narendra Modi on November 8 last year announced the demonetisation diktat.
According to Reserve Bank of India’s annual report released on Wednesday, August 30, out of the Rs 15.44 lakh crore worth of notes taken out of circulation, Rs 15.28 lakh crore came back to the system by way of deposits by the public. Which means that only Rs 16,000 crore was not deposited back into the banks.
Buried in the voluminous report is the fact that RBI is yet to calculate the old notes lying in cooperative banks, which were stopped midstream from accepting banned notes fearing the hugely unaccountable system, now popular in large swathes of the country, was becoming a conduit for turning black money into white. A lot of old notes came from Nepal where Indian currency is as good as the Nepali. What if the total amount exceeds Rs 16000 crore? How will the government justify getting back more than it had withdrawn from circulation?
Initially, Jaitley defended demonetisation by making it a good intent versus the Opposition battle. He said, “Those who did nothing to fight black money during their tenures had tried to confuse people about the real objectives of the note ban." And now, he has followed it up with, "The objective of the November 8, 2016 ban of the old Rs 1,000 and Rs 500 notes was not how much money would return to the system."
What about “snuffing out black money”?
The first line was completely in sync with PM Modi's November 8 note ban announcement speech. I list a few bullet points from the speech presenting the ban as an armour-breaching missile against the bastion of black money.
- Corruption and black money are diseases rooted in this country, they are obstacles to our success.
- Our measures to check black money are paying off.
- A Special Investigating Team is making progress to identify who has sent money abroad.
- Rs 1.25 lakh crores of black money has been recovered.
And the following all-so-important bit on how the fight against black money and the decision to impose note-ban were inseparable, according to PM Modi.
- We need to take a new solid step to fight black money. From now on, Rs 500 and Rs 1,000 notes will not be used. You have 50 days to turn them into banks and post offices.
Jaitley is right that the objective of note-ban wasn't confiscation of all Rs 500 and Rs 1000 notes. What he is skirting is that at the core of the note-ban logic instead was “snuffing out black money”.
Here’s what was offered. If on November 8, 2016 there was rs 15.44 lakh crore in Rs 500 and Rs 1,000, then the gap between this figure and the amount (in demonetized notes) which would come back to the banks eventually could be termed as “black money, or black money snuffed out”. During November and December 2016, in endless off-camera, off-record briefings, it was conveyed by men handling the demonetisation exercise, that around Rs 3 trillion (or Rs 3 lakh crore) would not return to the banking system, as it was unaccounted for, or “black money”.
How calculations went awry
Note-ban was challenged in the courts. Defending it in the Supreme Court in November, then then attorney general Mukul Rohatgi, representing the Centre, had on record claimed that around Rs 4-5 trillion (Rs 4-5 lakh crore, or about one-third of the demonetised cash) would probably not find its way back into the system.
The government may state otherwise but barely one month into the demonetisation diktat, in December 2016, it was becoming evident that tax evaders had managed to legalise their dishonest money using mules and proxies to deposit cash. The government was jolly well aware of the fact that high-value purchases and backdated bills were being used and helpful bank officials were colluding in the exchange of old currency for new.
Cut to the present, and the government stands just as arrogant, despite the extent of demonetisation disaster becoming crystal clear. Even now, it hasn’t admitted that its calculations went terribly wrong. Its assessment that note-ban would scare black money owners to hide and dispose off the dishonest shade of currency was faulty.
Government wanted the calculations to go right as cash-strapped banks would get a quick liquidity fix and lending situation may improve. It expected a bounty, from the shortfall in currency, as the liquidated notes returned.
Jaitley was right when he said that note-ban has produced results. India, the cash-loving economy, did court a more digital life for a while, until that too plateaued to pre-demonetisation levels. Left-wing ultras and militants have struggled somewhat to get funds. Even stone-pelting in Kashmir came down indicating a direct connection between black funds and anti-national activities.
No breaching the armour plates
But Jaitley and the government know that these were not the armour plates that note-ban was supposed to tear past and destroy. Plain and simple, it was the parallel economy of black money. Behind the Edwin Lutyens and Howard Baker designed walls in the corridors of North and South Blocks on the Raisina Hill, deep down there is resentment built on a realisation — that while their colleagues worked overtime to meet the demands of jostling queues with old notes, thousands of bank staff, chartered accountants and legendary Indian jugaad capability defeated note-ban's key intent to snuff out a large chunk of black money.
Black money owners were helped and abetted to use the little windows of relaxation to deposit what the government assumed they wouldn't. The Opposition will seek answers. Critics will remain divided between calling note-ban a move that was spurred by naivety or conspiracy.
I feel the government is guilty of getting aroused merely by the eyeball strength of note-ban. It hoped that fear of the law and call of conscience would discourage the dishonest from reaching the cash counters in banks to exchange old for new. However, it simply didn't have the manpower to put all the money flooding the system under a microscope.
Free hand to dishonesty
Government should have known that while law is smart, lawbreakers are smarter. During those 50 post note-ban days, dishonest ingenuity had peaked. There were restrictions. Revenue guys were watching and banks allegedly had monitors, cops guarded banks. But we didn't see even a single Mr Money Bags standing in a bank queue to exchange notes. The black money hoarders were not sweating profusely as Prime Minister Narendra Modi had said they would be.
In a country where roughly 35 per cent of the population lives below subsistence levels, it's the poor and the middle classes who possessed most of the 15.44 lakh crore of demonetised Rs 500 and Rs 1,000 notes. Each person was allowed to exchange just Rs 4,000 per day for months. How did then Rs 4 lakh crore over and above the government estimate sneak back into the system?
It's not through some great Indian rope trick that these men managed to push their dirty stash into the banks, making note-ban an exercise more inclusive in nature than the NDA government’s Jan Dhan drive. The system helped them defeating the very government that supposedly wanted the black money hoarders to drown their useless stash into rivers.
Notes on the money trail
But the clouds have a silver lining. Yes, it’s true that clever accountants, financial whiz-kids devised methods to push in black money without any hitch in the system. But in the process, they made one mistake. Before note-ban it wasn't known who had what volume of money. Post note-ban, the government was watching.
Note-ban was an unprecedented exercise in the annals of Indian history. It happened in the 21 century. Money now leaves a deeper, more visible trail than it did say when Bofors scam blew in the late 80s. Government has data to mine and scrutinise. If there are 25 lakh suspect transactions, they can lead the taxmen to the accounts of those who hold the money. If the taxmen can probe past the layers of transactions and mule/proxy account holders, note-ban will end up producing indirect results. But that would take years.
RBI’s annual report shows a steep rise in the number of transactions, which can be termed suspicious. Banks filed 361,214 such reports in 2016-17, up from 61,361 the previous year. FM Jaitley said that this proves that people have been forced to deposit the money that was “illegitimately lying with them”.
Blend in all this and the conclusion sits closer to what jaitley meant when he said on Wednesday: “The real objective of demonetisation was formalisation, attack on black money, less cash currency, bigger tax base, digitisation, and a blow to terrorism. And, we do believe that in each of these areas, the effect has been extremely positive.”
R Gandhi, former deputy governor of RBI, endorsed the government’s assessment when he said, "The fact that the entire demonetised money has come back shows black money has been accounted for completely. In that sense, demonetisation has been a success. This puts the ball in the tax department’s court. It has a job to do."
Who owned what volume of money deposited in banks post note-ban is work in progress. In January 2017, the government decided to use data analytics to identify people whose deposits didn’t match their known sources of income. A government release on Wednesday, August 30, said that 1.8 million accounts were being scrutinised as part of “Operation Clean Money”, and that from November 2016 to May 2017, a total of Rs 17,526 crore has been found as undisclosed income and Rs 1,003 crore has been seized.
Transactions of more than 300,000 registered companies are under the radar. 100,000 companies have been struck off the list. The government has already identified more than 37,000 shell companies engaged in hiding black money and hawala transactions.
The government also added that as a result of demonetisation, the number of income tax returns filed has gone up. In the first week of August there was an increase of 24.7 per cent, compared to 9.9 per cent the previous year.
The new economic affairs secretary Subhash Garg, who replaced superannuated Shaktikanta Das who steered the titanic note-ban, said: "The short-term, small negative impacts… on economic activity have played out fully. Long-term positives will continue to strengthen fundamentals. With the RBI disclosing the numbers of returned notes today (Wednesday) and the measure having been successfully implemented, debate should be over.”
There are more note-ban benefits visible. Finance ministry says that the volume of cash in the banking system has come down by 17 per cent, net currency in circulation has fallen from Rs 17.77 trillion on November 8, 2016 to Rs 14.75 trillion on August 4, 2017.
Digital transactions are up. Finance ministry data shows that the 1.1 billion digital transactions recorded mean a 56 per cent rise between October 2016 and May 2017.
Interestingly, RBI detected 762,072 counterfeit notes compared to 632,926 pieces last year. But it's way below estimates as the total value of fake notes is paltry Rs 43 crore.
Criticisms abound
The Opposition will continue to attack. Anand Sharma of the Congress said, "The government needs to answer what it achieved from the note-ban." Naresh Aggarwal of the Samajwadi Party, a member of the parliamentary panel for finance, said: "For long we were asking the RBI governor for the details of cash returned. He didn't give the details till the last meeting of the panel one day before the release of the annual report. This is a breach of privilege."
The Opposition’s anguish has a political reason. Note-ban didn't just send hapless millions to stand in long, meandering queues. There was a direct benefit for the BJP. Note-ban ruined the economy of political parties.
Parties like the Bahujan Samaj Party (BSP), which have traditionally operated on donations and fund collections, in the absence of institutions or corporate donors, were rendered bankrupt by note-ban during November and December, 2016, barely one month before the make-or-break Assembly elections were due in Uttar Pradesh.
In fact, recent media reports on BSP chief Mayawati's recorded telephonic conversations with one-time-confidante-turned-rebel Naseemuddin Siddiqui, are perfect indicators to the economic disarray the note-ban had created in political parties. BSP chief in the clandestine recordings is heard asking for cash donations promised by candidates (fielded by BSP) after the elections, as note-ban prevented them from doing so before the polls.
The Opposition says that note-ban was the key reason behind BJP's historic UP victory. But it's also a fact that PM Modi and his team read the political fallout of note-ban right. The poor and those below prosperity line who stood in queues, lost savings and jobs in the unorganised sector, were nevertheless convinced that note-ban was a blow against black money and the corrupt. They loved the audacity of the move. The worst victims of corruption and the black economy that emerged unscathed from the note-ban exercise, felt Narendra Modi was a prime minister with spunk.
Almost 10 months after November 8, 2016, no one with great sense of authority can deny or prove that all the money that has come back is now white or not. There, of course, are millions of transactions with discrepancies, which the RBI and tax department will eventually examine. A significant portion of the notes deposited may be representing unexplained, unaccounted for or black money.
But the key question here is this: Did note ban succeed or did it flop? The clashing narratives from the government and the Opposition create a situation of a 400ml capacity glass with 200ml water in it.
Some will say it's half empty. Others will claim it's half full.