Demonetisation was a disaster. No amount of alt-facts can change that

Prasenjit Bose
Prasenjit BoseSep 05, 2017 | 14:03

Demonetisation was a disaster. No amount of alt-facts can change that

"Alt-facts" have become a favoured device of the establishment in the post-truth era. At an earlier age, this was termed as "inexactitude" in parliamentary language or a "pack of lies" in common parlance.

An apposite exemplar is the set of claims recently made in a statement issued by the Union ministry of finance regarding the immense benefits of demonetisation which have accrued to the Indian economy and people.


These official assertions were made on the same day when the RBI finally reported that almost 99 per cent of the proscribed currency notes of 500 and 1,000-rupee denomination had returned to the banking system by June 30, 2017.

The finance ministry claims that the government had actually expected 99 per cent of the cash to return to the system at the very outset. If that was so, why weren't new currency notes adequately printed well in advance, leading to an acute shortage of cash which afflicted the entire economy between November 8 and end of December, 2016?

So, the revenue inflow post demonetisation stands below Rs 4,000 crore so far. Photo: Reuters

The chief economic advisor of the SBI had argued through two op-ed pieces in the Business Standard (November 14 and November 23, 2016) that since 25 per cent of the proscribed currency notes did not return to the banking system during the 1978 demonetisation episode, it is reasonable to assume that 25-50 per cent of the proscribed currencies will not be exchanged in the present instance. He projected that currency notes' worth between Rs. 2.5 to 4.8 trillion, in which illicit wealth were stored, would not return and consequently RBI's liabilities will get "extinguished" by an equivalent amount, which can then be transferred as surplus to the government, in order to spend on infrastructure et al.


Even the then attorney general argued in the Supreme Court that cash worth Rs 4-5 lakh crore will be "neutralised". It was the expectation of a fiscal windfall that prodded the prime minister to ask for a 50-day window during his November 13 speech in Goa. Once those expectations were belied by subsequent events - with currency exchange and bank deposits surpassing official expectations - the government changed its narrative to the promotion of digital payments and formalising the informal economy.

The finance ministry claims that demonetisation has helped in "flushing out black money". However, the data provided by the ministry itself shows that between November 2016 to May 2017, the total amount of undisclosed income unearthed is Rs 17,526 crore, out of which Rs 1,003 crore was seized. The crackdown on benami transactions so far has yielded another Rs 600 crore. The second income disclosure scheme of 2016-17 announced after demonetisation fetched another Rs 2,300 crore as revenue.

So, the revenue inflow post demonetisation stands below Rs 4,000 crore so far.

The annual report of the RBI has informed that its surplus transferred to the central government in 2016-17 came down by around Rs 35,000 crore from 2015-16, mainly due to demonetisation. An additional Rs 4,544 crore was spent on printing new currency notes and a whopping Rs 18,004 crore had to be spent in 2016-17 on account of interest payments due to absorption of surplus liquidity in the banking system post-demonetisation.


This Rs 22,500 crore loss incurred by the RBI in 2016-17 should be added to the loss in tax revenues owing to the economic growth slowdown following demonetisation. The Gross Value Added (GVA) growth rate fell from 6.7 per cent in the third quarter to 5.6 per cent in the last quarter of 2016-17 and has remained at 5.6 per cent in the first quarter of 2017-18. Therefore, it is fair to assume at least a 1 per cent reduction in the real GVA growth rate in 2016-17 due to demonetisation.

The loss in GVA comes to approximately Rs 1 lakh crore and assuming a tax-GVA ratio of 9 per cent (same as CSO estimates for 2016-17); the tax revenue loss of the government would amount to another Rs 9,000 crore.

Thus, a Rs 4,000 crore revenue gain has accrued to the government after losing Rs 31,500 crore. Can this be considered a rational policy? Within the 29 crore bank accounts opened under the Jan Dhan Yojana, the rapid reduction in the proportion of zero-balance accounts from 77 per cent to 21 per cent post-demonetisation should be a pointer to where the illicit cash has actually gone.

The ministry does not seem to have any clue as to how to bring this within the ambit of taxation.

The finance ministry's claims on elimination of fake currency also fly in the face of facts. The government had presented an estimate of Rs 400 crore worth of fake currencies circulating in the Indian economy to the Supreme Court, on the basis of a 2016 study conducted by the Indian Statistical Institute (commissioned by the ministry of home affairs).

The RBI annual report has now revealed that the total counterfeit currency notes of Rs 500 and 1,000 detected till March 2017 was worth only Rs 41.5 crore, which is around one-tenth of the ISI-MHA estimate for 2014-15. Moreover, the RBI's annual report shows that Rs 13.75 lakh worth counterfeit currency in the newly issued Rs 2,000 and Rs 500 notes was detected by March 2017.

Thus, the infrastructure of counterfeiting Indian currency notes appears to have remained untouched by demonetisation.

As far as ending terrorism is concerned, data from the South Asia Terrorism Portal shows that fatalities in terrorism-related violence in 2017 had touched 541 till August, against a total of 893 and 722 in 2016 and 2015, respectively. The total number of fatalities in Jammu and Kashmir till August 2017 alone is 239, compared to 267 in 2016 and 174 in 2015.

Does it signal a decline in terrorist violence since demonetisation?

The finance ministry has cited the decline in cash circulation in the economy and the increase in digital payments as successes of demonetisation. It is not possible to conclude on the basis of available data how much of the shift to digital payments post-demonetisation is a result of the imposed currency shortage and hence a transient, rather than a permanent and voluntary shift to digital payments.

Moreover, was a massive liquidity shock like demonetisation at all necessary to shift cash-users to digital payments? The gains to the larger economy from such a shift should not be exaggerated. Digitisation may enhance the convenience and transparency of transactions, but it can also increase transaction costs as well as possibilities of misuse, given India's abysmal levels of financial and digital literacy and the deeply unequal socio-economic structure.

The fact remains that even the fiscal costs of demonetisation have surpassed its benefits so far. The people who lost their jobs in the growth slowdown - some even lost their lives while standing in bank queues - of course lost much more.

Last updated: September 06, 2017 | 12:08
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