Home >Opinion >Columns >Opinion | A costly experiment that failed to deliver

Demonetization was probably the biggest disruption brought about in the last decade which was based on erroneous assumptions and implemented in a rather unstructured manner, leading to the economy coming to a virtual standstill with the small and medium-sized enterprises (SME) segment and farming community being affected the most. Yet looking back now, everyone seems to be a winner. Systems have been streamlined to leave audit trails. People have become savvy and have turned digital. Currency in circulation continues to rule and cash is as important as ever. However, the collateral damage has been in the SME sector which is still struggling and employment has taken a big hit. And the Reserve Bank of India (RBI) surplus came down by over 50% meaning thereby less transfers to the government.

The assumption of cash being used to hoard black money has not been proved. Terror financing could have been an issue but the reduction in such incidents is more due to the credit of our security agencies which have controlled the same. Counterfeit currency has never been proved by RBI data. So clearly the initial thoughts were not right. Along the way the emphasis was put on digitization, though it is illogical for one to go in for demonetization to force people to digitize. Normally incentives are provided to move transactions into the digital world.

The implementation of the move was not neat as the banks did not have regular supplies of currency, nor was it known that the ATMs were not compatible with the new notes. The quantum of circulars that were issued by RBI in the period of two months or so was just too high and gave the impression that there was no concrete plan in place to implement the same as rules were fine-tuned depending on the responses of the public. Quite clearly the banking system was not prepared for this process and while the surprise element was required to catch the wrong doers (terror, black money, counterfeit) the inconvenience caused to over a billion people was unnecessary. The incongruity of the exercise was that while it was argued that black money resided in high-value currency of 500 and 1,000, they were replaced with 500 and 2,000 notes! It should have been in only lower denomination notes in case the argument had any serious merit.

The post Diwali phase of 2016 was important because it was a year with normal monsoon after successive years of sub-normal rainfall and it was widely expected that the festival-cum-harvest season would reignite demand. Not only did this not happen but also with employment in the SME sector being affected and payments to these units being impacted, the economy has gone through a serious downturn which is still in progress.

The subsequent measures that have been announced for the SMEs are good, but the damage done was deeper and it would take time before they are able to recoup and restore normalcy in operations. In fact, banks are reluctant to lend to them given the higher probability of delinquency in their loans.

Therefore, the question to be asked is whether or not such a measure should ever be attempted again. The answer is a definite no. It has been a costly experiment that has disrupted economic activity. The reverberations can still be heard and do not sound good.

Madan Sabnavis is chief economist at CARE Ratings. The views expressed are personal.

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