By Vipin Pubby
The first anniversary of demonetisation, which was described as the ‘boldest’ economic reform undertaken since the independence, has unleashed a major debate between its protagonists and critics.
The debate was kicked off by former prime minister Dr Manmohan Singh who said it was an “organised loot” and “plunder” and Union finance minister Arun Jaitely hit back by saying that these words “best described” the various scandals involving 2G, mining and Commonwealth Games.
Demonetisation and its fallout can be discussed from the economic and political angles. As far as political fallout is concerned, it proved to be a master stroke in the short run. The announcement came just before the critical Assembly elections in Uttar Pradesh. BJP’s two main rivals in the state, Samajwadi Party and Bahujan Samaj Party, were known to be cash-driven parties. Both suffered a body blow with the demonetisation and it was one of the major reasons the BJP romped home with runaway success.
Its impact on politics in the long run is still awaited but the move followed a few months later by the roll out of Goods and Services Tax (GST) is now giving nightmares to the BJP. The party is aware of the adverse effect of the twin moves and is worried about its fallout in the ensuing Gujarat Assembly elections.
As far as the economic impact of demonetisation is concerned, most experts are now coming to the conclusion that it was an unwise move and met none of the goals which were set or declared at the time of the dramatic announcement late on November 8 last year. As Pranab Bardhan, Professor of Graduate School at the Department of Economics, University of California, Berkeley, says, the ‘brahmastra’ of demonetisation “has turned out to be one of the grandest hoaxes in Indian political history”.
Most of the respected financial newspapers, journals and experts have criticised the move and have said there would be no major short-term or long-term gain from the move that sucked out 86 per cent of the currency leading to financial chaos for several months, slowing down of GDP by over two per cent, loss of jobs estimated at 1.5 million and severely hitting small and medium scale enterprises most of which are yet to recover from the losses. “The output of my small scale unit has fallen by half and I don’t foresee complete revival in the near future”, said Sunil Agarwal, who runs a machine tools unit at Dera Bassi.
The government, however, thinks it was a resounding success. A PMO release said as many as 17.73 lakh suspicious cases were identified that do not match their tax profile. “Deposits worth Rs 3.68 lakh crore are under suspicion, 2.24 lakh shell companies faced the axe and stone-pelting incidents in Kashmir came down by 75% from the previous year”.
That the government kept shifting its goalposts is well known. It initially claimed that the demonetisation was aimed at curbing black market and to cut the supply of funds to terrorist organisations. It then went on to say that the idea was to weed out counterfeit currency notes which were pumped in by unfriendly countries to disrupt our economy. The government subsequently said the aim was to make India a “cashless” society and then to “less-cash” society. The results are for anyone to see. There is no reduction in black money or corruption. With over 99 per cent of the old currency notes finding way back to the banks, the claim of weeding out counterfeit notes also fell flat. It also hasn’t prompted people to move towards plastic money.
For the ordinary citizens, the adverse after effects of ‘notebandi’ are not yet over. The organised sector and the small and medium enterprises are yet to fully recover. The introduction and roll out of the GST has further added to their problems. Mohd Ehsan, a construction worker, says that the construction activity is yet to recover from the blow and many of his friends have returned to their home state of Uttar Pradesh for want of work in urban areas.
To be fair to prime minister Modi, his intentions behind ordering demonetisation may be sincere. No body alleges that he or those close to him made any profit out of demonetisation. The sole exception of the business deals of BJP chief AmIt Shah’s son are still under scrutiny. Even though the timing of the announcement was a little suspect, the intent behind the move is not questionable. However, neither any in-depth study was undertaken for its impact nor preparations for its smooth rollout were planned.
Demonetisation has not proved successful in any of the half a dozen countries it had been imposed in the past. All these countries were undergoing economic crisis. India, on the other hand, was doing well with its GDP soaring 7.5 per cent. It has so far proved to be a self inflicted wound.