Tuesday , 17 July 2018

Demonetisation is a mixed bag

By Dr D M Deshpande

Even after a year of note ban, opinion is sharply divided on whether it has succeeded or failed. The ruling party celebrated the event as ‘anti black money day’; while the opposition observed it as ‘black day’! Not just the political parties, which is quite understandable, differences persist even amongst economists, experts in finance and generally the educated citizens of this country.

There is no denying that it was in more than one way a historic step which involved declaring 86% of the cash in currency as invalid in one stroke. The eighth of November 2016 will remain itched in the collective memory of Indians as a bold and unprecedented move in the fight against black money in the country.

To take the negatives of the currency ban first, it did impact the growth of the economy. No one will be able to precisely calculate and tell how much of the slow down is attributable to demonetisation and subsequent remonetisation, as there are other factors such as rolling out of GST, impact of external factors and the like. What is, however, true is that, in the bargain, India lost the tag of the fastest growing economy in the world. Withdrawal of high denomination currency suddenly hit the informal sector in both urban and rural areas. It created a kind of panic and vacuum that prices of several agricultural commodities crashed almost all over India. The resultant price depression has driven the farming community in several states to agitation and in certain extreme cases to commit suicide. Ironically, all this has happened in a good monsoon and agricultural year where farmers, in the absence of sudden and massive disruption caused by DeMo, would have lived in relative peace and happiness. Indian farmers collectively produced record food grains output for 2016-17.

Small and medium industries contribute around 25% to the GDP of India. They have fared no better; all this is showing in terms of looming job crisis. In what can be said as seen as a sense of urgency, if not panic, the Government is pushed to take up certain reform measures quickly. Slashing of GST rates on a wide range of consumer and daily use goods is a pointer in that direction. Ironically, of the initially professed objectives of DeMo have been met. It has not made serious dent in unearthing unaccounted money or for that matter in further generation of the same. This has, probably, led to Government shifting its goalpost from time to time. Latest in this version is, that DeMo was aimed at ushering in a cash less economy!

It is not that there are no positives of DeMo exercise. Though it is true that 99 plus percent of the money came back in to the banking system, the fact is that over 3 lakh Crores of this is probably not accounted for and the Government appears to be determined to pursue it relentlessly.

What DeMo has done is that it has created huge awareness about the non-cash method of payments for purchases especially in rural and interior regions. Though the data suggests that cash is still ‘king’, there has been some progress in making India ‘less cash’ economy. (Total cash less economy is almost a myth and may not even be a desirable policy objective) This is also collaborated in increases in both direct and indirect taxes in the post DeMo period.

Instead of wasting time in arguments, what the Government needs to do is to focus on the gains made by DeMo. It can give a tremendous boost to digital transactions by simply making the task of opening a bank account easier. It can learn from the experiences of other countries in Africa, China where it is just a matter of a click/minute to open a bank account. As long it remains fixated on only one idea of curbing the menace of black money, it cannot do many other good things. As Phillips Wendell said ‘eternal vigilance is the price of liberty’, government may have to allow certain shrinkage of regulatory procedures and bureaucratic delays. At least some of the long term objectives of DeMo can be achieved provided the government acts now and sustain it for future time period.

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