Demonetisation: A cup half-empty or half-full?
Last week, the Reserve Bank of India (RBI) finally put to rest the troubling claims and counter claims on one key metric to measure the impact of demonetisation of high value currency notes carried out in November. Its annual report released last Wednesday revealed that 98.96% of the Rs15.44 trillion notes invalidated by demonetisation had been deposited with banks.
The fact that it had not led to, as some sections of government had claimed, the extinguishing of about Rs4 trillion of illegal currency holdings has provided fresh ballast to the critics of demonetisation. And no doubt, they will feel even more emboldened with former RBI governor Raghuram Rajan going public with his criticism over the weekend. To be sure, Rajan is making a far more nuanced argument than the binary claims of critics, but then in today’s binary discourse who cares for such niceties.
Is everyone missing the woods for the trees? This column has been repeatedly arguing that while the economic logic of demonetisation is not convincing, the intangible gains from this rather out-of-the-box solution can’t be ignored either.
It is precisely for this reason, if the strident critics can care to recall, that the electorate of Uttar Pradesh shrugged off the opposition’s full blown campaign centred around demonetisation to give Prime Minister Narendra Modi-led Bharatiya Janata Party (BJP) a stunning two-thirds majority in the state election.
Throughout the campaign, Mint’s reporters discovered that though people were impacted by the dislocation triggered by demonetisation, they were still willing to go along with it. On being queried further, they said it symbolized the determination of Modi to fight corruption. Implicitly what they were signalling is the enviable trust quotient the Prime Minister has struck with large sections of the electorate—providing the basis for the social capital Modi has earned over the last three years in various electoral contests.
Over seven decades, corruption has consumed the innards of India, impacting every institution and consequently governance. What the privileged fail to grasp is that impact of corruption is greatest on those at the bottom of the pyramid. At the very basic level, it denies them the fundamental basis to live—right to good education, drinking water, electricity and a home.
It was not surprising then that for most of Bharat (as opposed to the India of the elites) demonetisation represented a giant detox moment—especially if we tag it to other measures to tackle black money taken over the last two years. To put it simply, a section of the populace believed, it restored the premium on honesty. (Personally, we will all have anecdotes on how this could have been life changing even for us).
And yes, the jury is still out on whether demonetisation can more than just maim the idea of corruption. Especially since the same RBI annual report from last week shows a rather dramatic spike in the number of suspicious transaction reports filed by banks, financial institutions and intermediaries in 2016-17—it was up from 61,361 in the previous year to a staggering 361,214.
One of the explanations being put forth by the government, which has seized on this bit of data to justify its actions, is that it confirms that some of these deposits with banks are the outcome of laundering of black money. Anecdotally we know how people deployed mules to both deposit and withdraw money to escape the demonetisation rules. But discovering proof is another thing; the income tax authorities claim they are using big data to mine for such illegal transactions.
The evidence is unlikely to surface very soon. Till such time political rhetoric will keep the debate on demonetisation oscillating between the two extremes. At the moment it is simply a case of a half-empty or half-full cup—depending entirely upon which side of the binary discourse you approach the debate from.
Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics.
His Twitter handle is @capitalcalculus.
Respond to this column at firstname.lastname@example.org