Note ban: harassed for nothing

The Reserve Bank of India’s final count of the currency deposited after the November 8, 2016, note ban indicates that Prime Minister Narendra Modi’s demonetisation failed to serve its cardinal purpose of unearthing and rendering useless black money held in cash. It was officially expected that currency worth around Rs 3 lakh crore in circulation at the time would not be deposited in banks. Their owners would not be able to lay claim on them as it was black money or unaccounted for cash. This has not happened. Virtually all the demonetised cash has come back into the banking system. It was an expected outcome as most black money or unaccounted income in the country is held not in cash but in gold, real estate or stock market instruments.

What is more, the statistics shows that neither people’s propensity to hold cash – money in circulation – nor the preference for high denomination currency notes has gone down. Moreover, the proportion of fake currency notes discovered by RBI remained the same, before and after. Thus, a critical national security angle that was used to justify demonetisation — making life difficult for counterfeiters — has not worked. They are still in the game, faking the new currency notes seemingly as easily as they did the old ones. Finally, it was hoped that people would switch to a more digital lifestyle which would require less use of cash, but even that has not happened.

Instead, demonetisation created a setback for the economy. The GDP growth rate, which had touched 8.2% in 2015-16, fell to 7.1% in 2016-17, and further to 6.7% in 2017-18. Quarterly figures indicate that the growth rate is only now getting back to the previous trajectory. Perhaps the biggest point against demonetisation is that it most affected the relatively unbanked rural areas and poor people working in the informal sector, including those engaged in farming, weaving and other unorganised professions. Such people, who keep a little bit of cash at home for emergencies, had to stand in bank queues, forgoing wages for days, to deposit their little savings. It is not known for sure why Prime Minister Modi went in for the exercise despite receiving the best advice against it. It is unlikely that he did not know that those who have unaccounted wealth do not keep it in cash. A plausible explanation is that demonetisation was a purely political move to make life difficult for opposition parties by rendering their cash-holding useless ahead of crucial elections. Since the BJP did very well in the UP assembly elections that followed a few months later, that purpose may have been well served. But was the harassment of the entire nation, particularly the millions of unorganised sector workers who lost wages and livelihoods, using the false pretext of unearthing black money, justified?