Demonetisation was worst idea ever (and government silence proves that)

Anshuman Tiwari
Anshuman TiwariFeb 19, 2017 | 14:36

Demonetisation was worst idea ever (and government silence proves that)

Demonetisation, India's boldest idea against the empire of black money, was never expected to terminate in deafening silence. The much-anticipated Union Budget followed by the RBI's monetary policy has passed mutely without giving an iota of information on the impact and result of the noteban exercise.

However, reading the fine print of Budget and Economic Survey numbers reveals certain significant facts, which explains why the government resisted speaking on the consequences of India’s most excruciating reform.


Can’t measure, can’t manage

If you can't measure it, you can't manage it, goes a saying. Finance minister Arun Jaitley himself declared in November that there is no reliable estimation of black money or cash in black revolving in the system.

If that is the case, the government was further expected to explain on what grounds the decision to withdraw Rs 500 and Rs 1,000 notes was taken.

If we go by the Economic Survey, the decision was taken on the basis of soil rate (the rate of soiling of notes as well as physical damage to them). The soil rate shows how often the notes have changed hands.

The soil rate is 33 per cent for notes below Rs 500 denomination, RBI data showed. It means 33 per cent of notes below Rs 500 are replaced every year. The soil rate of Rs 500 notes is 22 per cent whereas that of Rs 1,000 notes is 11 per cent.

The survey, by using relative soil rates for the $50 and $20 bills and applying them to comparable Indian high denomination notes, concluded that there were high denomination notes of Rs 3 lakh crore which were rarely used in transactions.


Can this amount be taken as black money, which amounts to 2 per cent of GDP?

If you can't measure it, you can't manage it, goes a saying.

The survey is silent on the answer, although it logically explains the difference between black money and white money:

White Money: It is the money stored in households for emergencies or for giving salary in cash to employees, the payments and receipts of which they declare to tax authorities.

Black Money: Black money is when small enterprises pay for input in cash but do not declare the transaction to tax authorities. The unaccounted cash stashed by businessmen to distribute to their favoured candidate during election campaigns is also considered black money.

At sixes and sevens

The Budget figures do not seem to be hitting the noteban targets. Tax figures do not hold any promise of giving extraordinary windfall, even though the figures show that the growth rate in tax collection will be high.

After the noteban, the advance tax payment increased by 35 per cent. Next year an increase of 25 per cent in tax collection is expected. If the figures turn out to be correct, in the next two years, an amount of Rs 1.5 lakh crore can be added to the total tax collection.


Much before RBI governor Urjit Patel's advice, the RBI developed a thick skin on the results of demonetisation. There are no figures available of any huge dividend coming from the RBI, as the bank is muted on how much money has been left outside the banking system in the form of big notes.

Collateral damage

After endlessly reiterating that the noteban has not created an economic slowdown, the government has finally accepted that growth has been derailed. The Economic Survey shows growth rate will fall by 1 per cent in the current (2016-17) year from last year’s rate of 7.6 per cent.

The Economic Survey concedes that the noteban has severely hit agriculture and the unorganised sector, and the government has no estimates for these losses.  

The final reckoning

Because the noteban was a monetary decision, its gains and losses should also be reckoned in numbers. After combing through the Economic Survey, we get only two sets of reliable numbers about it:

Gain: In the next four months to one year, an additional growth of Rs 1.5 lakh crore in tax collection can be hoped for.

Losses: In 2016-17, there will be a loss of about 1 per cent to GDP because of the noteban, which comes in at around Rs 1.5 lakh crore.

To put it in perspective, the increase in tax revenues gets balanced by loss in GDP of the formal economy.

Note that indirect losses, cost of printing new notes and the interest on issuance of bonds for liquidity management, have not been added here.

In the light of these numbers, no economic expertise is required to understand - itna sannata kyu hai bhai!

Last updated: February 20, 2017 | 20:45
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