While subsequently anecdotal evidence from across the country suggested the unorganized sector was badly hit by demonetization of high-value currencies as it faced a cash crunch for at least six months, the ruling Bharatiya Janata Party government reaped political dividend by winning the Uttar Pradesh state elections with a landslide majority.
Former chief economic adviser Arvind Subramanian in his book Of Counsel: The Challenges of the Modi-Jaitley Economy, which was released last year, called demonetization a “massive, draconian, monetary shock" and hinted he was not consulted on the matter. On why demonetization was popular politically even if it imposed economic costs, Subramanian held that in some cases, at least where there are charismatic leaders, policy actions that adversely affect more people are more likely to succeed than actions whose impact is confined to a narrow few. “Apparently, they find it difficult to take on, say, PSB unions, entrenched bureaucrats, or rich farmers, but less difficult to take on the entire informal sector," he said.
However, what surprised most economists is that on 31 January 2019, the statistics ministry revised upward its growth estimates for 2016-17, the year of demonetization, from 7.1% to 8.2%, thus making it the year with the fastest economic growth under the previous government. Similarly, data for 2017-18 during which the goods and services tax (GST) was implemented was revised upwards from the 6.6% estimated earlier to 7.2%.
“Earlier this year, there were also substantial upward revisions to estimates for 2016-17 and 2017-18, which seemed surprising given that they were years when the short-term impact of two major policy actions —demonetization and GST—would have been most severe," Subramanian wrote in his controversial working paper on India’s perplexing gross domestic product (GDP) estimates published on the Harvard University website.
Despite the government’s stated objective of reducing currency-to-GDP ratio to make the country a less-cash economy, currency in circulation has come back with a vengeance even as digital payments have grown substantially. Former economic affairs secretary in the finance ministry Subhash Chandra Garg said cash is still quite high in the system and the ₹2,000 notes introduced after demonetization are being used for hoarding.
Calling for another demonetization, Garg last month said people should be asked to deposit the ₹2,000 notes in their bank accounts without any counter replacement. “ ₹2,000 bank notes account for one-third of currency notes in circulation in value terms. A good chunk of the ₹2,000 notes are actually not in circulation, having been hoarded. The ₹2,000 note, therefore, is at present not working as a currency of transaction. It can be demonetized without causing any disruption," he said.
Garg said expansion of digital payments is taking place all over the world, but it is happening in India at a much slower pace. “Digital payment products continue to face two major disabilities. Only banks are permitted effectively to offer and non-banks and other financial sector players are not. Amendments in the Payment and Settlement Act made through Finance Bill 2017 are still to be notified. Proposals by the committee in 2019 are literally dumped," he said.
The sharp growth in income-tax return filings seen after the June 2016 amnesty scheme as well as the demonetization in November in the same year has now taken a beating with the economy slipping into a deep growth slowdown. The trend of more than 20% surge in return filings seen in FY17 and in FY18, has now given way to one of contraction in FY19, a trend not seen in nearly a decade for which data is readily available.
The number of income-tax returns filed had grown 6.5% in FY15 to 40.4 million and then surged 14.5% in FY16 before jumping 20.5% in FY17, the year of demonetization, according to data from the Central Board of Direct Taxes. The government had also announced an income disclosure scheme with effect from June 2016 for people to report previously untaxed income, pay tax and penalty, and avoid prosecution. In the subsequent year, FY18, income-tax returns filed surged by 23.1% to 68.7 million. The tax department’s persuasion through text messages and emails that accompanied the government’s drive against black money had aided this surge along with a steady growth in the economy. However, return filings could not sustain the momentum in the next fiscal. It showed a contraction in FY19 by nearly 2% to 67.4 million from the high base of the previous year as economic growth further slipped to 6.8% in FY19.
The government’s massive currency culling exercise gave fillip to digital payments. With meagre cash in hand, immediately post note ban, use of debit cards with merchants became popular. Before 2016, debit cards were used mainly to withdraw cash from ATMs. This also brought opportunities for several startups such as Paytm, MobiKwik, for person-to-person payments. Similarly, use of real-time payments system Unified Payments Interface, mobile banking, picked up rapidly. Other platforms such as utilities payment portal Bharat Bill Payment System, also developed by RBI-backed National Payments Corp. of India were launched to make payments simple, hassle-free and on the phone.
Gireesh Chandra Prasad and Shreya Nandi contributed to this story.