There is always a direct link between money supply and growth and can be applied to the NDA as well as UPA periods. During 2004-10, the average money supply increased annually at 18 per cent (15.3 per cent under the NDA). The unmonitored high denomination note (HDN) stock with the public made black money deals easy. In 1999, the cash in the system was 9.4 per cent of GDP, while by 2007-08, it went up to 13 per cent. The HDNs doubled from 34 per cent in 2004 to 79 per cent in 2010. And on November 8, 2016, it was 87 per cent. The Reserve Bank of India (RBI) now found that two-thirds of the Rs 1,000 notes and one-third of the Rs 500 notes, amounting to over Rs 6 lakh crore, never returned to banks after they were issued. During the UPA regime, HDNs were heavily invested in assets such as stocks, gold and land, besides used in consumption. Had the HDNs been circulated via the banks, inflation and interest could have been under check and funds could be provided for industry and economic growth. The UPA could have remonetised the HDNs by smaller denominations, avoiding economic damage. The NDA realised that the HDNs resulted in rampant corruption and helped terror funding through fake notes. Six months before coming to power, when the BJP was in the Opposition, the party had opposed the UPA government’s decision to recall notes issued prior to 2005. At the time, the BJP said that such a move would achieve very little to curb black money and corruption.
To reverse the failures of the previous government, the NDA has taken a bold step to demonetise and remonetise. Realising that the exercise could only be successful if certain incentives are proposed for driving digital transactions, the government is gearing up to create the needed infrastructure to enable digital transformation, both in urban and rural India. The interim report submitted to Narendra Modi by the committee on digital payments recommends tax benefits for merchants, users and subsidies for device makers.
The emphasis on Aadhaar Enabled Payment System shows that the government will employ a unified approach pooling in all the stakeholders. It will be fruitful to create the needed bank acceptance infrastructure in the semi-urban and rural areas to be incentivised with the help of funds saved from cashless transactions, besides promoting contactless payments. The necessary amendments in the Prevention of Money Laundering Act can keep a check on illegal economic activities. Also, bank cash transaction tax levy could make a major impact in shifting transaction habits of people. India, which today ranks very low in digital payments, compared to other BRICS (Brazil, Russia, China and South Africa) nations and many other economies, could achieve a turnaround if a right mechanism is used to roll out the digitisation process. Once digital transaction costs are brought down, cash control will become easy.