It has been more than two months since Prime Minister Narendra Modi announced a massive effort to exchange older high-value currency notes, thereby sending a shock to the Indian economy, but demonetisation still seems somewhat amorphous. It was originally announced as a way of fighting black money, terrorism and counterfeit notes. That suddenly transformed into a push toward a cashless society, which later became a “less cash effort”. On Sunday, Union Finance Minister Arun Jaitley posted his own look back at the two months since Modi announced demonetisation.

Even though the currency exchange move was massive, affecting 86% of the currency in circulation, the government has been reluctant to put on paper any specific figures listing out its aims and what it expects to achieve through demonetisation. Despite being the Union finance minister, and having had two months to put his figures together, Jaitley continues in this vein in Sunday’s blog post, with almost nothing in the way of specifics in his analysis.

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Still, the post includes a few details about Modi’s intentions and what ought to happen as a result of it, although Jaitley stops short of actually promising anything. Here’s a quick look at these:

Modi-fy India

Jaitley brings up what has become the standard talking point about the currency exchange move: Black money was all over the country for the last 70 years. Modi’s move, however, will change the way Indians act

“The Prime Minister’s decision is intended to create a new ‘normal’. It seeks to change the expenditure pattern of India and Indians. It is obviously disruptive. All reforms are disruptive. They change the retrograde status quo. The demonetisation puts a premium on honesty and penalises dishonest conduct.”  

Can we measure it? Jaitley begins this section by pointing out, as Modi has also done, how few Indians filed returns and paid tax on their incomes. If demonetisation has somehow made Indians more honest, that number will change massively.

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Less cash

“Paper currency opens the doors for many vices. When governments are able to collect more tax from tax evaders, they are in a better position to collect less tax from everyone else. Reducing cash may not eliminate crime and terrorism but it can inflict serious blow on them.” 

Can we measure it?

  • The ratio of cash-to-GDP before demonetisation was 12% in India, one would expect that to come down the following year.
  • Jaitley has already said he expects tax revenues to beat budgeted estimates for 2016-’17, which we’ll know for sure soon after the budget.
  • Crime and terror coming down? We won’t be able to authoritatively measure that for years, and even then causation might be hard to establish.

Tax revenue

Jaitley insists that the mere fact that most high-value notes have been deposited in the system doesn’t mean demonetisation has failed.

“Black money does not change its colour merely because it is deposited in bank. On the contrary, it loses its anonymity and can now be identified with its owner. The Revenue Department would thus be entitled to tax this money.”  

Can we measure it? The tax revenue earned, including penalties leveled on those who have signed up to the two income declaration schemes, will have to at least make up for the actual cost of demonetisation (which we still don’t have a handle on) and the reduced economic activity. Indeed, to be worth it, the tax revenues will have to be much much greater than what has been lost.

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Cheap credit

“Economic activity is being restored. The banks today admittedly have a lot more money available in order to lend for growth. Since this money constitutes low cost deposits with the banks, it is bound to bring down the rate of interest. Both these things have already happened. “  

Can we measure it? Interest rates have already begun to fall, although for that to actually matter, demand within the system will also have to perk up. Reserve Bank of India data suggest credit growth in December was the slowest it has been in decades.

GDP growth

“The size of the banking transactions and consequently the size of the economy is bound to increase. In the medium and long run, the GDP would be bigger and cleaner.”

Can we measure it? Yes, although agreeing on what medium-term means in this case may not be easy.