Last week, the Reserve Bank of India (RBI) disclosed that all but 10,720 crore of the 15.4 trillion of demonetized high-value currencies, is back in the banking system. In the process, RBI formally belied the government’s much touted ex-ante claim that at least 3 trillion of this money, since it was stored as illegal cash, will be extinguished, serving up an unexpected fiscal bonanza.

The political blood letting that followed once again ensured that issues continue to be obfuscated and degenerate into a blame game targeting potential electoral gains. The actual outcome of this audacious move, for several reasons, is far more nuanced.

For one, the expected economic gains from demonetisation, as most critics have rightly argued, was questionable, especially, the fundamental claim about a substantial chunk of high-value currency getting extinguished. This claim was based on the assumption that most of the black money, or illegal wealth, was being stashed away in cash.

With the benefit of hindsight, this was obviously an erroneous assumption; needless to say, policy mandarins should have known better.

Worse, even the cash holdings were easily laundered by exploiting various loopholes.

This leads to the second point about how, after the initial shock, money was laundered through mules—exactly why we ended up with serpentine queues—and some complicit personnel, including in the banking system.

Yes; the Union government got egg on its face, as it was unable to contain laundering. True, but it is actually a resounding wake-up call about a broken system.

It has long been suspected that the delivery system in India, especially of public goods, has been thoroughly corrupt and rendered inefficient—exactly why the parallel economy financed by black money has taken root. The hollowing out of institutions, key to the sound functioning of a democracy, has only exacerbated this problem.

Third, flowing from the above, is the underlying politics of demonetisation. Unveiling the move, Prime Minister Narendra Modi had emphasized the importance of demonetisation of high-value currencies in targeting black money. Since illegal wealth is stored by the corrupt, the general populace read this as the singular message of demonetisation—something that definitely contributed to the record victory the Bharatiya Janata Party (BJP) achieved in the Uttar Pradesh election soon after. The sense was, like this column has said in the past, that the premium on honesty was being restored.

Indeed, the move was ham-handed and riddled with avoidable administrative glitches. But the scale and audacity of the move sent out a strong signal that the government was determined to pursue the rule of law.

The introduction of the goods and services tax (GST) last year has only spurred India to move even further away from the discretion-based approach.

Fourthly, it is more than just coincidence that there has been a marked broadening of India’s direct tax base. Information sharing among various tax arms of the government has grown dramatically over the last decade and more.

The introduction of GST has only underlined the audit trails in economic transactions, making it that much more difficult to conceal money.

Finance minister Arun Jaitley had disclosed last week, in a social media post, that the number of income tax returns almost doubled from 38 million in 2013-14 to 68.6 million in fiscal 2017-18.

While it was never the Plan A of the demonetisation strategy, the growth in digital money has got a big leg-up. With e-commerce poised to accelerate, there is every reason to believe that this will only gather further momentum. Exactly why foreign investors, including Warren Buffet, are lining up for a slice of the action.

Finally, the biggest let-down has been that politics of confrontation has denied the country a fair debate on demonetisation. Disruption in Parliament ensured that we never really heard from the finance minister on the logic of the move, the extent of black money and so on.

Neither did we get to hear the critics. (In contrast, in 1991, when then Prime Minister Narasimha Rao unleashed an unprecedented acceleration in reforms, Parliament witnessed a revealing debate.)

Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics. His Twitter handle is @capitalcalculus.

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