Editorial: Economic disaster

Exactly six years ago, an out-of-the-blue announcement on demonetisation by Prime Minister Narendra Modi took the nation by surprise. It was packaged as a bold move to unearth black money, reduce counterfeit currency and choke terror funding. But it turned out to be India’s greatest economic disaster. As far as the merits of the move […]

Exactly six years ago, an out-of-the-blue announcement on demonetisation by Prime Minister Narendra Modi took the nation by surprise. It was packaged as a bold move to unearth black money, reduce counterfeit currency and choke terror funding. But it turned out to be India’s greatest economic disaster. As far as the merits of the move are concerned, note ban is probably the worst economic step in independent India. It has achieved none of the objectives it was supposed to achieve. Instead, it had inflicted untold miseries on the people, crushed several businesses and destroyed the informal sector, throwing millions out of jobs. Ironically, cash has again become the king. The total amount of currency in circulation is now at its highest level of 14% of the GDP, compared with 12% in 2010. While the currency levels dropped significantly immediately after demonetisation, they bounced back soon to all-time high levels. India’s use of cash, at 14% of GDP, is among the highest of all major economies compared with 3% for developed nations and 5-7% for developing nations like Bangladesh and Indonesia. If the government thought that banning high-value currency overnight would discourage the use of cash, it has been proven totally wrong. According to the latest RBI data on money supply, the currency with the public increased to Rs 30.88 lakh crore as on October 21. The central bank data put the currency in circulation at Rs 17.7 lakh crore on November 4, 2016.

It would be fallacious to claim that demonetisation did not adversely impact GDP growth. There was an economic output loss of nearly Rs 2 lakh crore in the year post-demonetisation. At least now, the NDA government must acknowledge that the note ban was a failure and apologise to the nation. The ill-conceived demonetisation has thrown the economy into disarray and ruined jobs. Instead of bringing in the promised advantages, demonetisation has had a number of terrible consequences for the country’s economy. The MSME sector suffered the most since these small and medium-sized businesses relied heavily on cash, and the abrupt currency ban forced the closure of lakhs of MSMEs. The government, however, never admitted that the note ban failed to achieve its key agenda of crippling the black money economy. The linking of cash in circulation to corruption and black money was a problematic premise as it is common knowledge among tax experts that only 6-8% of black money accumulated by direct and indirect tax evaders is held in the form of cash. Most of it is converted into assets, real estate, gold and foreign currency deposits abroad. With about 99.3% of the demonetised currency notes coming back to the banks, the outcome of one of the most disruptive economic step has become highly questionable.

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