Was demonetisation a useful exercise?

On the 4th anniversary of demonetisation on November 8, Prime Minister Narendra Modi put out a tweet highlighting the benefits accrued due to the demonetisation exercise with the hashtag #DeMolishingCorruption. The Congress, on the other hand, observed the day as ‘Betrayal Day’ and put out a campaign with the hashtag #SpeakUpAgainstDeMoDisaster.

PM Modi’s Claims:

In his tweet, Prime Minister Narendra Modi wrote that “Demonetisation has helped reduce black money, increase tax compliance and formalization and given a boost to transparency. These outcomes have been greatly beneficial towards national progress.”

He put down a series of charts split broadly into four categories: Better Tax Compliance, Improved Tax/GDP Ratio, Lesser Cash Based Economy, and Addressed Threats to National Security. The points mentioned under each category is being reproduced below:

Better Tax Compliance:

  • Operation Clean Money was launched after demonetisation.
  • Self-Assessment Tax of more than ₹13,000 crore was paid by targeted non-filers.
  • 3.04 lakh persons who deposited cash of ₹10 lakh or more but had not filed their IT return were identified.
  • 2.09 lakh such identified non-filers responded and paid self-assessment tax of ₹6,531 crore.

Improved Tax/GDP Ratio:

  • A graph showed the steady decline of Direct Tax/GDP ratio between the years 2008 to 2016 from around 0.065 (₹ trillion) to less than 0.055 (₹ trillion). But after demonetisation, it reversed this downward trend and showed a sharp increase as the ratio lifted above 0.06 (₹ trillion) by 2019.

Lesser Cash Based Economy:

  • ₹16.41 lakh crore worth of notes were in circulation at the end of financial year 2015-16, registering Y-o-Y growth of 14.51% over 2014-15.
  • At this rate, notes in circulation would have increased to ₹28.49 lakh crore by end of 2019-20.
  • However, it increased only to ₹24.20 lakh crore by the end of 2019-20.
  • This shows that demonetisation followed by digitalization has succeeded in reducing incremental growth in currency in circulation by over ₹4.28 lakh crore.

Addressed Threats to National Security:

  • The total number of counterfeit notes detected decreased sharply post demonetisation (the accompanying graph showed a decrease from 7.62 lakh counterfeit notes in 2016-17 to 2.97 lakh notes in 2019-20).
  • Introduction of new notes enable better detection of fraud currency.
  • Decreased avenues for sources of terror financing and left-wing extremism financing, putting a brake on the funding of anti-national activities.

Allegations by Congress:

The Indian National Congress alleged that the BJP was shifting the goalposts when it comes to the explanatory reasons for carrying out demonetisation. “At different points, these (explanatory reasons) were — to counter black money and corruption, to stem out fake currency or “counterfeit”, for a “digital or cashless” economy, to tackle Maoism, terrorism and separatism, to bring idle savings into banks, to expand and deepen the tax base, to arrive at a bigger, cleaner and real GDP and for faster economic growth, to bring down real estate prices and to partner with the GST,” The New Indian Express quoted Congress general secretary Ajay Maken as saying.

Congress leader Rahul Gandhi released a video slamming the government’s demonetisation move. He said questioned how Bangladesh overtook the Indian economy. He said, “It is the time of COVID, and the question is, how did the economy of Bangladesh overtake the economy of India?  There was a time when India was the world’s highest performing economy. The government says that the reason for decline is COVID.  But if the reason is COVID, it is also applicable in Bangladesh, it is also applicable to the rest of the world, then how did India remain back?  Brothers and sisters, the reason is not COVID.  The reason is demonetisation.  The reason is GST.”

He also accused the Narendra Modi government of pandering to 2-3 crony industrialist friends through the demonetisation exercise. “By snatching your money from you, Narendra Modi wanted to give it away to his 2-3 industrialist friends.  You stood in line.  There were no big industrialist friends of Narendra Modi in that line.  You put your money in the bank and Narendra Modi took that money from the bank and gave it to his friends.  He waived their debt.  3 lakh 50 thousand crore rupees of their debt waived,” he said.

Former Union Finance Minister P Chidambaram slammed the Prime Minister for celebrating demonetisation. He tweeted, “According to PM, demonetization slayed the demons of corruption and black money. What is the colour of the crores of rupees spent by the BJP in purchasing MLAs in several states? If the demon of corruption has been slayed, are there no cases of corruption after November 8, 2016?” He followed up with another tweet, saying “CEA said that non-profit and non-corporate entities (tax evaders) deposited 16.2 %. of the total cash returned after demonetization. He should also tell us how much of that amount was confiscated as black money? We know the answer: ZERO.”

P.S. An article on Mint states that several academic studies have endorsed the benefits of demonetisation. Read it here.