The debate on the worthiness of demonetisation of high-value currency is back on the centre stage. According to the annual report of the Reserve Bank of India (RBI), 99% of the target currency is back in its chest. Added to it, the protracted slowdown in the gross domestic product (GDP) in Q1 of FY18 has become more pronounced, reaching a low of 5.7% compared with 6.1% registered in Q4 of FY17.
These signs and many more have collectively marked down the gains emanating from demonetisation in quantitative terms compared with its attendant expenditure and woes surrounding the banks and other stakeholders.
The much-awaited data on demonetised high-value currency shows that old notes worth Rs 15.44 lakh crore were there in the market, of which Rs 15.28 lakh crore is back. The unreturned currency value hardly works out close to Rs 16,000 crore.
However, the move has to be seen in conjunction with other well-thought-out interconnected strategic policy initiatives – (a) increased thrust on electronic transactions replacing cash (b) extending banking outreach by increasing density of touch points (c) imposing restrictions on cash transactions beyond Rs 2 lakh, which is down from Rs 3 lakh (d) PAN made mandatory on purchase of jewellery of Rs 2 lakh or more instead of Rs 5 lakh and (e) implementation of GST that simplifies and expands scope of indirect tax collections. It is also evident from the trends of registration and surpassed GST collection targets during the first month of its operations – July 2017.
This chain of policy initiatives is preplanned and need to be seen as extended parts of demonetisation. Its impact cannot be, therefore, quantified in the short-term. Hence, the debate is whether it was worth the pain undergone by millions of people and institutions, especially given the slowdown in the economy in the last 2-3 quarters. The subdued growth may continue in the next quarter as well by when the re-monetisation impact will stabilise the economy. These debates need to be seen beyond what numbers can speak.
Besides the pain and pangs of public at large, some of the noticeable implications of demonetisation have been – (i) acute cash crunch that halted the activities in rural economy (ii) slowdown in most of the economic activities across the country (iii) RBI dividend to government down by half to Rs 30,659 crore due to additional cost of managing high liquidity as a result of payment of interest on reverse repo to banks and cost of printing and logistics in moving replaced new currency notes (iv) banks engaged in exchanging currency notes could not ensure flow of credit to productive sectors of the economy, in the interim. This made the rural economy credit starved. (v) banks ran short of cash and many ATMs remained closed intensifying public inconvenience. These pain points can be one-time or short-term blips for the economy.
But the historic decision of demonetisation should not be confined to counting volume of currency flowing back to chests. It has a bigger purpose with long term benefits such as (i) demonstrative impact that such step can recur and hence hoarding of high-value currency is no good. (ii) expansion of formal economy on a perpetual basis speeding up GDP growth. (iii) sending alerts to real estate mongers who undervalue property prices and accept cash to deprive taxes to exchequer (iv) reminding people to stay tax-compliant instead of hatching methods to evade. (v) increased surveillance of tax authorities on evaders and helping tax payers (vi) cut in fund flows to finance illicit trade and terrorism that can eventually bring down crime (vii) stalling circulation of fake currency in the form of old high-value currency (viii) creating a psychological pressure on wrong doers and more importantly (ix) setting up a live example of compliance to the next generation entering the tax net. Such a list of long-term indirect behavioural dimensions is immense, which cannot precisely be quantified.
According to economists and finance experts, it will be possible to catapult the economic growth to 8%-plus in the medium-to-long-term horizon as unaccounted GDP tends to shrink. It can speed up the move towards a $5-trillion economy by 2022 from the present estimated GDP level of $2.2 trillion.
Having entered the trillion dollar club in 2011, India doubled its GDP in four years and reached $2 trillion by 2015-16. Hence, the speed of doubling gets narrower as India forges ahead — consciously creating an ecosystem to widen GDP and fast tracking tax collections. Perennial benefits may soon offset the pain and sacrifice made during demonetisation.
Fear will grip corrupt people as cash transactions will always be under the scanner. In order to make it happen on a perpetual basis, it will be necessary to sustain the forward journey of digitisation and formalisation of the economy.
The daunting challenge for any large economy is to envisage a tectonic cultural shift from a predominantly cash-intensive society to a less cash society. Sustaining it after completing the process of re-monetisation will need coordinated efforts and collective persuasion by all stakeholders.
Against this backdrop, it is clear that the long-term benefits will far outstrip near-term disruptions. Hence, opting for demonetisation was a bold decision that is set to bring better social transformation much beyond the quantitative dimensions can explain.
(The author is Director, National Institute of Banking Studies and Corporate Management (NIBSCOM))