Demonetization
success or failure?
8th November 2016 – 86% of Indian currency was wiped overnight
The Claims
Minor inconvenience
Black money would be destroyed
Initial news of massive raids. Political opponents targeted. News of currency seized from various people. Widespread understanding among critics and supporters alike that the objective was to strangle cash flows (legal or otherwise) of political opponents during the upcoming election campaign in Uttar Pradesh.
ISI fake currency thwarted
Fake currency notes would lose value when the notes it copied were illegitimate
Widely criticized through various versions of “amputating a leg to lose weight” or “bombing a city to kill criminals in it”, this was an irrational goal to begin with, to go through an exercise of this magnitude, expense and cost to economy to flush out a relatively minor number of notes that would at best lose value they didn’t have to begin with.
Prevent counterfeiting
The new notes would have special security features to prevent counterfeiting
Initial reports in media suggested that the new notes would have special features that prevented counterfeiting them. At the very least, having to imitiate a new design would slow the counterfeiters down and reduce the amount of fake currency in circulation.
Various reports in a pliant news media even took claims of special GPS chips embedded in notes and discussed them seriously, creating a perception among the masses that the new notes would be extraordinarily resistant to misuse or imitation.
Tax Collection would increase
Almost 25% increase in tax collection has been unquestioningly gushed over by a pliant media. This increase in tax collection has been attributed to demonetisation.
The Reality
Massive disruption
Unclear how much black money was recovered
Having cash in itself is not illegal, unless it is established that the cash would not be accounted for while paying taxes. Seizing it without evidence of wrongdoing probably is, but the government legally created impunity for tax officials, who are no longer required to explain their actions to anyone..
Fake currency made legitimate!!!
The reckless demonetisation did not allow for examining notes
The relentless crowds and high stress environment at banks did not allow for adequate examination of notes deposited and the overall understanding is that a large number of fake notes got deposited and converted into real money in accounts or converted to new currency – in effect robbing the country far worse than them being in circulation.
Easier counterfeiting
The new notes had no special features that prevented counterfeiting
The new notes are of poor quality and apparently easier to counterfeit. Various leaders and affiliates of the ruling party have been caught with counterfeited notes and the equipment to make more. The trust in the notes is very low and “even the real notes look fake”. Hurried printing has resulted in real notes not having all features they should have.
Among early news of counterfeiting included school children who had photocopied a Rs.2000 note and used it to dupe a sweets shop owner when they purchased treats using it.
There has been no change
Tax collection has been increasing year on year for a long time now, and if you look at the trend over the years, this year’s increase in collection fits the curve.
Unreturned money would be money taken away from criminals
82% of the money demonetised was rapidly returned to the banks about a fortnight before the last date to deposit demonetised notes, and the crowds continued unabated way after the RBI stopped updating figures on money returned. It has been over 7 months now and they still have not given out the final figures related with demonetisation, .
RBI would transfer profits to the government
RBI transferred Rs 30,659 crore as surplus to govt. This is lower than the Rs 65,876 crore last year – less than even half the amount. The budget has assumed Rs 75,000 crore would come from RBI and PSBs.
Not just is the windfall absent, the government has not even been able to reach half the amount of the previous year.
The windfall from demonetisation would fund welfare
In addition to the losses made by the government, the citizens have made losses – from disruption and decimation of livelihoods to time taken off daily wage work and expenses.
There will be no benefit/compensation to them. Likely, a reduction of existing benefits will happen due to the lack of funds this “minor inconvenience” will cause.
Mr Modi’s sudden, almost cataclysmic, DeMonetisation move is unprecedented in a democratic country. Without an open parliamentary or judicial enquiry , we will never know what exactly was the decision-making process that led the Prime Minister of India to make his dramatic announcement on 8 Nov, giving the citizens of the country little more than a few hours notice that 85% (by value) of the currency in their pockets, wallets, hand bags, or under their beds, would be worthless unless handed in to a bank.
The process is important. What advice, did the PM seek? Who was consulted? What expert advice did he receive? What was the debate within Govt about the pros and cons of the move? What advance preparations were made to deal with the aftermath to alleviate the disruption to the common man’s life and livelihood?
These are questions that in any other democracy MPs would be demanding to get answers to.
But not in India. Too readily did the people accept that if those with hoards of black money stashed away were not to be tipped off it had to be top secret; that no one, not even the highest in the Finance Ministry or in the Reserve Bank could be taken into confidence.
It appears therefore that it was largely one man’s decision. It displayed a singular lack of understanding of the nature of Money, of tax evasion, of the ‘epidemiology’ if you like of black money. It was one man’s whim to be seen as strong, decisive and bold.
That is arrogance and hubris. It is dangerous in a leader with unrivalled popularity and comprehensive power because, as in the story of the Emperor’s New Clothes, no one has the courage to speak the truth to the Leader for fear of being labelled disloyal. It is the first step toward one-man rule and ultimately to dictatorship.
a very nice comparison between promises and actual situation after demonetization.Thank for wring a very nice blog on this burning issue.
Well, on the declared goals of demonetization – ending terror, corruption and parallel economy in one fell swoop, an utter failure. But if the real goals of the government were bailing out banks with public savings and terrorizing little guys to pay tax, a resounding success.
Thing is, the present govt believes the citizens are just obstacles in its course. If there were none, it would manage the country very well.