The Real Impact of Demonetization in India
 
The Real Impact of Demonetization in India-9amstories Image Courtesy: The Indian Express

Demonetization is a massive success for the BJP, not so for India

Before you pan me as a critic of Demonetisation, please read my last article on Demonetisation (Positive Impact of Demonetisation). Now, let us look at all the supposed benefits of demonetization and whether they have been met OR if there was a possibility of meeting the objective

Objective 1: Unearthing black money

Yesterday, RBI announced that only Rs 16000 crores of currency were not returned to the bank during the demonetization period. This is not a huge surprise given how people scrambled around to 'convert' black to white. As a result, the number of 'suspicious cases filed' has increased 4.4 times over 2015-16. In 2014-15, there were 58000 cases filed.

In the same year, the Income Tax department had filed 669 cases for prosecution (obviously of previous years). The charges stuck only in 5% of the cases. With about 4.5 lakhs transactions this year, it needs to be seen how many are likely to generate revenue for the Income Tax department. The Income Tax department will need to expand its manpower manifold, its prosecution abilities will also have to improve manifold and at the same time curb corruption within the department.

In theory, this looks feasible but given its recent track record and the difficulty of attributing all cash to black, it is unlikely the Tax department will achieve much with these suspicious transactions. Further, many of those indulging in black money transactions are regular business people, many of who are BJP supporters. It is unlikely that the party will encourage large scale cases against these supporters.

Objective 2: Digital transactions

There is enough evidence including my above article to show that Demonetisation has helped in a massive jump in digital transactions. The question to be asked is whether the cost of Demonetisation (loss in GDP growth, reduction in RBI profits) is worth the jump in digital transactions. There could have been numerous other much cheaper ways to support jump in digital transactions.

For example, my estimate is that Demonetisation must have cost the economy anywhere between 60000 to 100000 crores in cost (Others have much higher estimates). If the Govt had offered a 5% discount on all digital transactions for a year, it would have cost the Govt anywhere between 25000 to 30000 crores with little economic disruption and death. So yes, digital transactions are a gain but the ROI from the cost incurred is not justifiable

Objective 3: Currency in circulation

Currency in circulation which crashed during the demonetization period gradually picked up after December. However, supporters of Demonetisation have pointed out the additional currency in hand of the public has fallen over the last 2 months and hence demonetization is finally showing results.See the chart below.

 

 

The Real Impact of Demonetization in India-9amstories

Now, how does this chart look for last year?

The Real Impact of Demonetization in India-9amstories

Last year too, additional currency with the public (last one month) had fallen during June and July. This indicates a seasonality factor. Let us see how this looks when we combine both charts

The Real Impact of Demonetization in India-9amstories

It is clear that the gap between last year and this year continues to be quite large even in June and July indicating that when the season changes, growth in currency with public will continue to be high and continue to grow. Yes, given the jump in digital transactions and spread, this would probably eventually settle at a lower ratio (to GDP) than before but as I pointed out, the cost of doing this is much higher than that incurred due to demonetisation. This could have been done at a lower cost and without demonetization

Objective 4: Winning elections in UP

I had mentioned in my article on November 11th that BJP will gain from Demonetisation in UP but not so in Punjab. This has come true. Apart from showcasing the party as strong on corruption, provoking schadenfreude tendencies of ordinary citizens, the biggest damage to the other parties was the availability of cash for the campaign. All of these enabled the BJP to beat a fractured opposition. In other words, demonetization definitely helped the BJP.

In Sum Except for winning the elections in UP, the rest of the benefits have turned out to be VERY EXPENSIVE or unlikely to be ever visible (Suspicious transactions). So Demonetisation was definitely a massive success for the BJP, not so for India.

The BJP as a party continues to be an ordinary performer on Governance. Having been in power for a long time in States like MP and Chhattisgarh, both States have underperformed most other States. The lack of emphasis on education (particularly in MP) hasn't helped much. While Raman Singh has been much more balanced in his approach, Chhattisgarh's location hasn't helped much.

Gujarat which the BJP won more than 20 years ago has kept progressing down the per capita ranks and now Karnataka, Kerala, Tamil Nadu and Telangana have pulled ahead. Yet, these States continue to re-elect BJP Governments. The BJP as a party has perfected the art of winning elections and therefore in that sense, Demonetisation has turned out to be a perfect election move and given the ordinary governance record, demonetization has turned out to be an ordinary governance move.

So the big question - Was demonetization a success for the right reasons?

By: Subhash Chandra | Political Consultant
Courtesy : https://www.linkedin.com/pulse - Mr. Subhash Chandra
 
 

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