Reality check: For all the shifting of goalposts, demonetisation is an utter failure

The costs far outweigh the benefits.

 

Modi jaitley
When scrapping the old Rs 500 and Rs 1,000 notes on November 8, Prime Minister Narendra Modi said it was to 1. Rid India of black money; 2. Filter out counterfeit currency; and 3. Bankrupt terrorist networks.

Let us now briefly examine how much he has achieved in his asked for 50 days.

The parallel economy is now commonly believed to be about 20%-25% of the gross domestic product, which means the government is estimated to lose taxes on income of about Rs 30 lakh crore to Rs 35 lakh crore, or about Rs 10 lakh crore. Last year, the government of India expected to collect Rs 15 lakh crore as direct and indirect taxes.

The so-called demonetisation – it’s better to call it currency exchange – thus was a huge exercise, but what did the government achieve?
 

The benefits

The Reserve Bank of India has reported that it recovered Rs 29.84 crore in fake notes out of the currency it had taken into the banking system during 2015-’16. Even the total value of fake currency in circulation at any given time is Rs 400 crore, and only 250 in every million notes are fake, estimated a 2015 joint study by the Indian Statistical Institute and National Investigation Agency. So this is just a case of the government not knowing what it is talking about.

As for terrorism, the fact that money in new Rs 2,000 notes was recovered from slain terrorists in Kashmir and other places speaks eloquently about the success.

It is empirically evidenced that of the undeclared income each year, almost half is invested in property, and about 44%-46% is equally invested in gold and jewellery and illicitly exported overseas, and just 4%-6% is held in cash.

Most of this black money is in flow and very little is held in stock – like the cash recovered from Tirumala Tirupati Devasthanams Trust Board member J Sekhar Reddy or suspended Tamil Nadu Chief Secretary P Rama Mohana Rao. People with great wealth keep very little of it in cash. Only fools keep money idle. Money, white or black, is constantly put to work.

How do we encounter this money? When even ordinary middle class families celebrate a wedding, the expenses for flowers and decorations, priests and musicians, food and refreshments, and even a part of the venue charges are asked for and paid in cash. This might very well be good and hard-earned tax-paid money, but it slips into the vast untaxed and parallel economy. Some of this money then re-enters the white economy in the form of expenses for food, fuel, clothes and other everyday expenses but a major part enters the black economy to be transformed into property and jewellery.

The better connected send it abroad. According to Global Financial Integrity, India has exported an average of $46 billion each year for the past decade. This from where the fabled Rs 15 lakhs for every Indian citizen was to have come. In the last two years, not a cent has come back. The Gold bond scheme has so far been mostly a flop and gold remains gold hanging on necks and buried in vaults. There has been no spike in the past 48 days either.

But of the Rs 14.4 lakh crore or 86% of all currency notes withdrawn, the banks have received Rs 13.2 lakh crore till December 13. Out of the outstanding Rs 1.2 lakh crore, about Rs 30,000-Rs 40,000 crores is in neighbouring countries like Nepal, Bhutan, Sri Lanka, Bangladesh and Afghanistan where Indian rupees are commonly used. In addition, our non-resident Indian brethren and cousins would have an equivalent amount. The rest would probably mostly be with very poor people deep in the hinterland who perhaps don’t even know that their carefully tucked away high value notes are no longer valid for exchange. So, at best, the government might get Rs 30,000 crore instead of the windfall of Rs 4 lakh crore to Rs 5 lakh crore the government seemed to believe it would get, assuming, of course, that the RBI decides to pass on these written-off liabilities to the government in some form.

We don’t know how many undeclared high value notes have entered the banking system after November 8. That will entail some taxation. Before November, the government had yet another amnesty scheme which fetched it declarations of about Rs 60,000 crores translating to about Rs 25,000 crores. This latest amnesty after November 8 is expected to fetch it a similar declaration but it will fetch it more taxation as a penal taxation also kicks in. This means another Rs 30,000 crores.
 

The costs

So what did these Rs 60,000 crores cost to get? The new notes will cost about Rs 42,000 crore, considering that Rs 500 and Rs 2,000 notes cost about Rs 4 and Rs 6 each to print and deliver. But there are other costs, which are far greater. The abrupt withdrawal of cash practically destroyed the daily wage economy that is about 200 million-250 million strong out of the unorganized sector’s 415 million. The average daily wage last year was Rs 272 per head.

This money is barely enough to feed and provide the most basic essentials for a family of five. Imagine how many jobs have been lost. Early estimates suggest that almost 80-100 million daily workers are without work. Millions have gone back home to their villages in Bihar, Uttar Pradesh, Madhya Pradesh, Orissa and Assam. I was recently in UP and Bihar and the devastation to the rural economy is palpable. Overall, credit card spending in the country has dropped from Rs 55,000 crores in October to Rs 32,000 crore in November, though the number of transactions have gone up hugely.
Most economists, including the biggest economist of all, Dr Manmohan Singh are agreed that we are now set to lose about 2% of GDP. That means about Rs 2.5 lakh crore. GDP lost is lost forever so it is a cost. When the cost toting is all done it will most probably be much more than that.
Arvind Panagariya, the top sarkari economist speaking for demonetisation, agrees that “supply chains” have been disrupted but new ones will regenerate, as happened in New Orleans after Hurricane Katrina. This is an unfortunate and weak analogy. Katrina was an act of nature. Demonetisation is an act of utter stupidity.
 

Towards digitalisation

The prime minister seems to have realised this. He is now slyly making this a campaign for digitalisation or for cashless-ness.

Here is a reality check. In the poorer states like Bihar, UP, MP, Orissa and Assam, the teledensity is about 50%. The ATM density is about one for every 10,000 as opposed to one for every 3,000-4,000 in states like Tamil Nadu and Maharashtra with superior banking networks. Only 20% of the ATMs are in rural areas. Development here is highly desirable, but it will take many years. Professionals expect we will reach a desired level only in 2021.

Then, there is a cost to digitalisation. According to the RBI, a Rs 100 note lasts about a year and is good for an average of 1,000 transactions or change of hands before it needs to be replaced. These transactions amount to Rs 1,00,000. A new Rs 100 note now costs about Rs.3 to print and distribute and is the cost of facilitating Rs 100,000 worth transaction.

But if you do a like number of digital transactions by credit or debit card, or by systems like PayTm, which the prime minister is apparently huckstering, the charge is anywhere between 0.6 % to 2%. Let’s be generous and assume 1%. A thousand transactions of Rs 100 each will generate a cumulative income of Rs 1,000 for the digital transfer companies and banks. Compare Rs 3 to Rs1000. What kind of economic logic is this for a country where the daily wage for over 200 million unorganized workers is just Rs 272?

Digital transactions are neat and simple. Better off people obviously prefer them for their convenience. But they are just too costly and inconvenient for people who cannot afford them or are not hooked up to the digital cash system. They will become more common in time when the average India gets wealthier and has much more than Rs 272 daily to support his family.

So the big question is: Why this shifting of goalposts? In a recent discussion, one fellow panelist described it as suddenly switching a game of hockey midway into football. I have a crueller description. I say digitalisation is just a fig leaf for the failed demonetisation.

Courtesy: Scroll.in

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