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Monday, September 11, 2017

Was Demonetization really a Success?


Its been almost a year since the Demonetisation announcement by the Indian prime minister but the argument has actually not subsided on whether it was a success or a failure. The pro BJP faction is sharing statistics to justify the decision and glorify the outcome while the anti BJP faction is doing just the opposite. To add on, experts from many different walks of the world have shared their opinion which sadly too has been corrupted by the biased narrative.  

So, the common man is confused – was this a success or a failure? That is what I am hoping to help you understand by the end of this article.

Why this article?

Ever since our GDP Growth slowdown news came out, people have been quick to blame Demonetization. I wrote an article a few days back explaining the reason why our GDP is slowing down. But, since people are blaming Demonetization, the BJP Supporters have retaliated by sharing news/statistics on how it was needed or useful. A good friend of mine sent me the list and wanted me to comment whether they are true or not. So, I thought why not write an article since its going to be a lengthy response… Here we go.

How this article is structured

I will be listing down all those demonetization was successful because arguments one by one and adding my opinion on whether it is True or not.

Before we begin: This is not a politically motivated article. The views in this article are entirely the authors and are not a representation of any group or faction. If you disagree with the views expressed in this article, kindly refrain from posting derogatory or abusive comments. Such comments WILL NOT be published.

Argument 1: It was done to catch Black Money and was a success Partially True

This was of course the major reason that was cited when this drastic decision was announced. Yes, any transaction in cash cannot be tracked by the tax-man (unless the shopkeeper actually gives a receipt and declares the income) and with lax enforcement by corrupt officials, the shadow cash economy has been booming for years in India. By making old currency notes invalid, people holding on to stacks of cash have no choice but to deposit or exchange it in a bank which means, it will be caught.

Unfortunately, our citizens are smarter when it comes to money and hiding the taxable income. People used their relatives accounts, hawala brokers who in-turn used proxies to deposit large amounts as smaller values into different accounts, bank officials helped the rich & powerful and in the end nearly 99% of the demonetized notes found their way back into the Banks.

The government hasn’t released accurate statistics on how many suspicious transactions have been taken up for investigation or the quantum of black money that was unearthed. Until these figures are made public, I would consider this argument as a only Partially True

Argument 2: It has prevented the growth of Black Money - Invalid

By cancelling old denominations, and re-introducing new ones, there was only a temporary jolt to the growth of black money. Once people get their hands on the new currency notes (supply of new currency notes has pretty much normalized across the country) they will continue to resort to going back to their old ways.

Citing Demonetization as something that would prevent the growth of black money is like giving Amrutanjan to a guy suffering from Migraine and telling him that this is the permanent cure for his ailment. It is merely a temporary relief and not a permanent cure.

In fact, I would actually call this an Invalid argument that doesn’t require a True or False comment.

Argument 3: It has expanded the tax payer base - Partially True

This is yet another legit explanation or argument. Cash, when deposited into a bank account effectively starts a paper-trail for the tax man to start looking into. Any individual who can deposit 1 or 2 lakhs into their bank account should have had some income sources. By reviewing these suspect transactions, the government effectively would expand the tax payer base (when done right of course).

As mentioned in argument 1 until the statistics are released by the government on exactly how many new tax payers were identified, I would consider this argument too as partially true at best.

Note: The messages circulated make claims about potentially 2.9 lakh crores worth of money being investigated by the government and make hypotheticals to say, even if 50% of this is black money, government will get X crores as tax revenue. Until the statistics are actually released by the Government of India, I would take these news sharing’s with a pinch of salt and consider them as only partially true.

Argument 4:  It has brought down the volume of high denomination currency notes - False

Similar to argument 2, this one too is an invalid argument. The government has introduced 2000 rupee notes instead of old 500 and 1000 denominations. So, instead of carrying 1 lakh in their pocket with 100 notes of 1000 each, a guy wishing to conceal cash can now carry 2 lakhs with 100 notes of 2000 each. Until these 2000’s are phased out (not sure when) this argument doesn’t hold true. So, am not going into the true or false point

Argument 5: It has infused cash from the parallel economy into the banking system - True

This is really and truly a success for the Demonetization exercise. Because of the exercise, banks in India got a real massive influx of deposits which was very beneficial for them. Even in my prior article on the detailed impact of demonetization I had mentioned that this move will result in a positive outlook for banks. So, this one is definitely a True

Argument 6: It has brought down interest rates - True

As with the cash influx for banks, in my prior article on detailed impact ofdemonetization, I had mentioned that this move will result in interest rates going down – which has actually happened. So, this one too is definitely a True.

Argument 7: It has increased household savings - False

As with arguments 2 & 4, I would consider this an invalid argument. This is merely a feel-good point added to a message to give the reader a sense of satisfaction. Money got deposited into a bank account and was then most likely withdrawn or spent. How can a move that invalidates a currency denomination result in increased household savings? This one is definitely False

Argument 8: It has crashed the rising land prices and made housing affordable - False

The indian real estate had grown at an unsustainable pace from the year 2000 onwards and had already hit a plateau by early 2016. An excess supply and refusal by builder to cut their profits resulted in a situation where demand was slowing and prices did not go up. It was more like a flat line maybe trending lower.

Demonetization did not result in a drastic reduction in housing prices and in fact the prices are pretty much where they were in 2016 prior to demonetization. So, this argument is False.  

Argument 9: Has facilitated the growth of real economy by bringing in the shadow economy into its fold - False

If Demonetization did in fact bring in the shadow economy which was suspected to be a good % of our GDP, the GDP growth figures over the last 3 quarters should’ve seen an upward trend. Unfortunately the trend has been negative. Even in my earlier article on the impact of demonetization on Economy & GDP, I had mentioned that there will only be a short-term negative impact and things should improve in the long run but I was unaware of the impending surprises like GST which further impacted the recovery process.

So for now, this argument is very much False. Until GDP growth statistics show a positive movement, believing this argument is just impossible  

Argument 10: It has eliminated fake currency and curb terror funding - False

Again, this was a one time True point but not a permanent solution. Fake racketeers will continue to figure out ways to produce fake currency notes no matter how many times the government demonetizes notes. So, this argument is false because terrorist activities still happen along our border and various parts of the country.


Final Tally:

The Final tally of the arguments is as follows:

  • False: 4
  • True: 2
  • Partially True: 2
  • Invalid: 2

Only 2 of the 10 arguments are True with 2 more being Partially True. The rest are either False or Invalid. Not to mention the months of inconvenience to the citizens or the approx 5000 crores that was actually spent in printing these new notes and bringing them into circulation. 

So, for now, I wouldn’t consider Demonetization a Success. Infact, the falling GDP growth, reduced industrial and agricultural output is a clear indication that decisions like this have significantly impacted our economy.



2 comments:

  1. Sir what about the argument that usage of digital money has increased bcoz of demonetisation...

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    Replies
    1. That is very much true but was increasing in the past 5 years even before demonetisation. With youngsters becoming more tech savvy, cashless transactions were on the rise anyways and could've been encouraged even without demonetisation.

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