Zhou Enlai, the Chinese leader, is often attributed the most pragmatic historical impact assessment of all times. Commenting on the impact of French Revolution of 1789, he is said to have remarked ‘it was too early to tell’. Whether Enlai actually said so, remains disputable. What is not disputable, however, is the need to observe data over a long period to understand the bearing a watershed event has on a nation’s life and destiny.
Demonetisation, Prime Minister Narendra Modi’s bold stroke from November 2016, is completing a year. Several event metrics have been used to define both the success and failure of this anti-black money battle launched by the PM. Perhaps the government got boxed in a corner by its own metric of ‘quantum of currency being extinguished’ as a sole success factor for demonetisation. Taking solely the currency-in-circulation view propounded by economists has perhaps prevented a big picture analysis of the tectonic event.
Demonetisation should be assessed on four long-term yardsticks, which have only just started to play out. Demonetisation was only the start and not the end of these four factors and a long period time series will better indicate how the measure changed the Indian economy.
First, demonetisation was a political statement as much as anything else. PM Modi made it clear that his fight against the termites chipping at the economy was a personal one, where he had no fear and he would make no favours. Indian citizens accustomed to the political rhetoric of anti-black money campaigns finally saw intent and action. Unlike excel-sheet driven analysts, common Davids understand the significance of the pain inflicted on Goliaths - a rare event in a country where the high and mighty almost always have the last word. Demonetisation raised the bar on political campaign against black money very high.
Representational image. Reuters.
Second, demonetisation became the precursor to drive compliance on matters of financial disclosure and taxation. Because the government went after black money, every individual or business hoarding black money will remember for a while that the downside of non-compliance is very high. And this perception will translate to recurring, not one-time, gains. India added 8.4 million new taxpayers in 2016-17, a jump of almost 27 percent over the new tax payers added in the preceding year. The number of e-returns filed has witnessed a 28 percent jump post demonetisation. Once the Goods and Services Tax (GST) stabilizes, it would make for a worthwhile study understanding demonetisation drove the sentiment in favour of new GST registrations.
Digitisation of Indian economy is a permanent gain from demonetisation. Digitization is again a long process, but the behaviour change of not using cash as default could only be driven by a shock like demonetisation. August 2017 witnessed 58 percent more digital transactions over August 2016. In October 2016, India had 1.5 million POS (point of sale) machines - cards had made their debut in India in 1969. In October 2017, there are 2.9 million POS machines - India added more card-processing infrastructure in one year than it had since the onset of cards decades ago!
Digitisation has led to serious players in the pre-paid instruments and wallets consolidating and fortifying their businesses. Google has launched Tez - its P2P payment platform from India. WhatsApp is rumoured to get into P2P payments as well. In a recent study, global investment banking leader Morgan Stanley summarized putative gains from digitization thus - “India was already on a path to growth, but the country’s drive toward digitization may put it on track to be the world's fastest growing economy over the next decade”. The investment bank estimates India to be the third largest global economy at $6 trillion by 2027, calling digitization a multi-trillion dollar opportunity.
Financial benefits of demonetisation will accrue to the economy on an ongoing basis. This will require government to follow-up on data insights gathered through the process of old currency notes being deposited in bank accounts. With 99 percent of the high value currency coming back to the bank accounts, the government can now go after all depositors making tax revenue gains in perpetuity. The government is now investigating deposits worth 3.7 lakh crores across 2.3 million bank accounts. More than 2 lakh companies, which had not filed their tax returns in the last two years, have been struck off from the Registrar of Companies. Deposits worth thousands of crores made by these companies are also under scrutiny and their directors have been barred from undertaking various forms of financial activities. Financial institutions reported almost half a million suspicious transactions during demonetisation and the same are under investigation. All these fact-finding missions should be taken to a logical conclusion by the government to bring costs to defaulters and further strengthening the belief of the common citizens in the intent of demonetisation.
As banks became sloshed with funds with high value currency being deposited in the banks, there were some near-term benefits as well. Interest rates went down and loans became cheaper. Real estate prices fell in many cities with cash transactions reducing and builders focusing on inventory clearance. These second order effects may not last forever, but they definitely helped the creditors and home-buyers at the margin.
Demonetisation jolted the economic status quo and created new templates for economic conduct with far greater alignment with the law of the land. History will use broad strokes to assess demonetisation as a catalyst of fundamental economic transformation.
(Aashish Chandorkar is a management consultant who writes on public policy)
Published Date: Nov 08, 2017 09:47 am | Updated Date: Nov 08, 2017 11:55 am
