Today marks the second anniversary of the demonetisation of all old Rs 500 and Rs 1,000 currency notes that the Narendra Modi government launched on November 8, rendering 86 percent of the currency in the system invalid.
During a televised speech delivered at 8:15 pm on November 8, 2016, Modi said the objective of the exercise was to curtail black money and curbing the role of fake currency in funding terrorism and other illegal activities.
Whether the massive and unprecedented exercise was successful and met its stated objectives or not, the debate on demonetisation’s impact on the economy continues.
C Rammanohar Reddy, the author of Demonetisation and Black Money, says the move had no basis in any economic theory and was completely unnecessary. Reddy, previously the editor of the Economic and Political Weekly and currently Scroll.in’s Readers’ Editor, discussed demonetisation’s impact on the economy and benefits, if any, in an interview by email with CNBCTV18.com. Edited excerpts: Q1. What is your assessment of the state of Indian economy, two years after demonetisation? How bad or good we look and how much will it shape electoral discourse?
The immediate effects of demonetisation have worn off. The disruption to economic activity has passed; cash has returned to the system, etc... growth has revived. The current state of the economy is affected by other factors, no longer demonetisation. But two points. (i) The enormous human and economic costs borne by the country due to demonetisation can’t be forgotten, all for no purpose. (ii) Many small-scale and tiny units permanently closed down; that cost has not been acknowledged.
Demonetisation was not an electoral issue in 2017, and it will not be in 2019. The strange thing about demonetisation is that the ruling party does not advertise it as an achievement and during elections the opposition has not attacked the government for this disaster.
Q2. Was demonetisation a completely futile exercise, even in theory? Or was it just a badly planned move by the government?
Countries have used demonetisation for a variety of reasons, but never on this scale and for this set of reasons as India did. It was wrong in conception and theory. It had no basis in any economic theory. We all know that very few independent economists were in favour at that time, and very few thereafter. So it was not a question of "being badly planned"; it was poorly thought out and a completely unnecessary and costly exercise.
Q3. Finance Minister Arun Jaitley said in August that the larger purpose of the government's demonetisation drive was to move India towards tax compliance and formalisation of the economy. Do you agree?
No, I would not agree. One, 18 months after "1.8 million depositors" have been identified for enquiry as mentioned by the finance minister in February 2017, please tell me if even one of them has been hauled up, and his/her black money seized. A government that claims to work can do better. Second, the one metric that is mentioned is tax collections. Yes direct tax collection growth has picked up. But (i) we have witnessed such growth earlier; will this last? (ii) Direct tax collection growth has also been affected by GST, because GST registration required you to register as an income tax assesse. Let us also not forget that this "larger purpose" was not mentioned by the Prime Minister in his speech of 8 November 2016.
Q4. Do you see the ongoing differences between the government and the RBI on liquidity crisis as a coup, two years after demonetisation? How bad the situation can turn as the triggers are still all over in place for the next round of tussle.
I would not use the word "coup". There are serious differences in which neither side is completely in the right. But on balance the government is in the wrong, because its attitude towards the RBI is like it has been towards other institutions -- weakening them: the courts, CBI, Election Commission, the Lok Pal (which it has not set up after almost 5 years in office) and now the central bank, all these institutions have felt the interference of the Government.
The government is the majority owner of banks, so if anyone should recapitalise the banks it is the government. No, I do not think there is a need for another independent regulator on payments outside the RBI.
Q5. What is your view on the idea that the RBI’s money should be used to recapitalise public sector lenders? Yet another flash point is the creation of an independent regulator, Payments Regulatory Board. RBI has rejected the idea, but is there some merit in having another independent regulator?