Demonetisation: Shifting goalposts to show success has kept focus away from real problems

More than a month has elapsed since the demonetisation of Rs 500 and Rs 1,000 notes was announced by Prime Minister Narendra Modi on November 8. During this period, the government seems to be constantly shifting focus as to what this move was supposed to achieve. Right from day one, those who know about these matters had argued that while this move would not dent the black economy, it would adversely impact the whole economy.

The government also seems to have realised this. Officials have admitted that little or no black cash will be extinguished since most of the issued high denomination notes is being returned into the banks for exchange into new currency. According to data, Rs 15.44 lakh crore of these two high denomination currency notes had been issued by the Reserve Bank of India and as of now about Rs 13 lakh crore have come back into the banks. It is expected that in the time remaining, the balance will also return to the RBI. But reports indicate that the economy is being severely dented.

Shifting goalposts

Governments do not admit mistakes. The present government has shifted the goalpost several times in the last one month. First it said that the pain is temporary while there will be big gains for the economy and especially for the poor. The government initially asked for 50 days. Now it seems that the pain will continue longer and especially for the poor who are in the unorganised sectors of the economy and who are unbanked, unconnected (by mobile phones) and used to dealing in cash. The workers in these sectors constitute almost 94% of the workforce. The rural sector and cottage industries are a major chunk of this unorganised sector.

Paper and ink for printing are short, so that the time to print the currency and overcome its shortage will take at least six to eight months. Since there is hoarding of currency, more will have to be printed and the shortage can last almost a year. Thus, the short term will not be short and the economy would experience longer term repercussions like fall in rate of growth and capacity utilisation leading to decline in the level of investment and employment.

In the absence of proper planning, every other day new rules and measures are being announced. For instance, earlier, older currency notes was to be be used for specified purposes up to November 24, which was later changed to mid-December. Sensing that most of the cash was being returned to the banks and that there would be no windfall gain to the government, the deadline was changed confusingly first to December 2 for some and December 10 for other purposes, while keeping it December 15 for yet another category.

Soon when it was realised that the bank accounts of the poor like, the Jan Dhan Accounts, were being used by the well-off to turn their cash into new currency, the prime minister asked the poor not to return such money. The Robin Hood image that the demonetisation policy would have created is sought to be sustained in this way.

A new Income Declaration Scheme was announced to enable the corrupt to pay a 50% tax and deposit 25% of the amount for four years in the programmes for the poor. The idea was that if people are depositing their black funds into accounts, they should be made to pay tax on it. However, it soon became clear that very little would come from this scheme. People were splitting the amount they were depositing into small amounts and depositing in many accounts.

From cashless to less cash

Once it was realised that most of the money was coming back and the impact on the black economy – or on terrorist financing – would be negligible, if at all, it was suggested that the move was to create a “cashless” economy with lots of benefits for everyone. It would lead to greater efficiency, there would be a paper trail for transactions so that black money could be tracked. But, the tax department only scrutinises a few lakh cases annually and cannot be expected to suddenly audit crores of cases, even with computerisation.

A “cashless” economy is a distant dream, given the infrastructure shortages, et cetera, so, the talk shifted to a “less cash” economy. Demonetisation is being portrayed as a great opportunity to move towards it. However, where is the preparation for moving towards such an economy? It would take quite a while to get more mobile phones into the system, tackle call drops, get reliable electricity and mobile connectivity to every nook and cranny, have regulation in place and get enough cyber security to prevent fraud. Above all, people require massive financial literacy and to become tech-savvy.

In the last one week there is news of stepped up raids on the black money hoarders. Reports are coming of large amounts of undeclared assets being caught – gold, old and new currency, et cetera.The impression sought to be created is that the system is being cleaned up. However, the raids are unearthing people having huge stashes of new currency notes of Rs 2,000.

This revelation suggests massive corruption in the banking system and that is leading to anger. While people wait in queues and still do not get the cash they need - for just running their households or for an emergency or for a wedding - the corrupt are converting their stashes of old notes into new ones.

The new spin is that demonetisation is only the first of many steps to curb the black economy and that the new Rs 2,000 notes will soon be withdrawn.

But why mix up so many things? Demonetisation is having a disastrous impact on the economy, especially the poor. So, tackling this should be the first priority, lest the economy slip into a recession. The nation faces a very complex situation. Why add further complications by diverting attention to a “less cash economy” or to raids, et cetera? All these measures require a lot of preparation and could be carried out independent of demonetisation and even if they yield results, that cannot be a yardstick of success of demonetisation.

Professor Arun Kumar is the author of The Black Economy in India, published by Penguin (India).