Blog Post

Demonetisation and its outcomes

Rajiv Kumar 13th April 2017

0N APRIL 11, finance minister Arun Jaitley informed the Rajya Sabha that ₹5,400 crore of undisclosed income had been detected since the November 8 announcement that demonetised 86 per cent of the currency in circulation. Critics will surely latch on to this rather measly figure to declare that demonetisation has palpably failed in expropriating owners of 'illegal money'. Such criticism would only further display the inherent ideological bias and politically motivated opposition by these critics.


This bias had led Amartya Sen to declare Prime Minister Narendra Modi to be a 'despot' and Manmohan Singh to lampoon the measure as 'organised loot'. Some economists had spelled the demise of SMEs that were cash-dependent. Others like Kaushik Basu and Arun Kumar had forecast a sustained downward spiral that would land the Indian economy in severe and deep recession in which it would flounder for a long time. And some like Prabhat Patnaik and his co-authors had pointed to a similar action in the former Soviet Union having been a factor in its break up in 1990 — the ominous implications for India being quite clear. From organised loot to the possible breakup of the country, demonetisation was attributed with all possible negative outcomes by its trenchant critics. In the light of developments in the post-demonetisation period, these critics should publicly recant and apologise. Will they?

Nothing even remotely resembling the dire forecasts of those viscerally opposed to Modi has come to pass and nor is it at all likely to emerge. GDP growth in 2017-18 will, in my estimate, be higher than in 2016-17 because the global economy is reviving and domestic investment is about to start rising as well. Export earnings, to which the unorganised sector contributes significantly, are rising since October 2016. The rupee, which was headed towards ₹70 to a dollar in November, has actually strengthened by more than 6 per cent since January 2017 despite the US Fed having raised rates. Rabi output is expected to be normal. Consumer price inflation is below 4 per cent; fiscal deficit remains within FRBM targets and the current account deficit at manageable levels. Real estate prices are beginning to creep up again in metros like Mumbai and Delhi and construction activity, pushed strongly by the government's promotion of affordable housing, is on the rise.

In complete contrast to the critics' ominous warnings, the Indian economy is well on track to not only sustain its growth momentum but may even see an inflexion point to a higher growth trajectory as investors, more confident of transparent governance and lower levels of corruption and easier environment for doing business, start expanding capacities. Indian economy not only not imploded as a result of demonetisation but has perhaps come out stronger and better primed for growth. Thank You.


However, the fight against illegal and criminal money and wealth is certainly not over by a long shot. The finance minister has pointed out that the IT department has identified 1.8 lakh bank accounts in which deposits do not reconcile with declared incomes and average deposits in these accounts has been about ₹3.01 crore, far above ₹2.5 lakh, which was seen to be the 'safe' amount to be deposited. These account holders are now being contacted and will hope-fully be pursued. The benami properties act and the instructions to link all bank accounts with Aadhar numbers will help unearth hordes of illegal wealth. Limits on cash transactions, linking Aadhar with PAN numbers will also surely identify a huge number of fictitious and ghost depositors, just as it did for ghost gas connections and kerosene users. Lowering the limit on political funding, though not optimal, will put some constraint on illegal monies being used for political purposes.

The good news surely is that having used the most drastic measure for signalling his commitment against corruption, Modi and his ministers can hardly afford to go soft on this now. The die against corruption, bribery and ill-got-ten monies has been irrevocably cast and it will be very difficult to roll it back.


However, there is simply no room for complacency. The wild show of money power in the now deferred RK Nagar constituency bypoll is sufficient evidence to show that the malaise is chronic and widespread. Corruption and illegality related to the political process will have to be fought for a long time. It is time for a real public debate on the issue of electoral funding, which will hopefully generate ideas to minimise, if not eliminate, pernicious corruption in this area.

However, an even greater danger lurking around is that of the tyranny of the tax-man over the honest individual and corporate taxpayers. It is already reported that in several cities, the intrepid tax inspector is already using his/her extra powers to harass honest taxpayers. This must change. Investors have to be convinced that additional powers granted to the IT department through recent amendments will neither apply retrospectively nor with vengeance or complete impunity.

The Modi government has benefited by people's positive response to demonetisation. He now has to demonstrate his unflinching support for domestic and foreign investors by reining in the tax officials, demanding utmost honesty of them — ruling out retrospective action except in the most exceptional case and assuring both the investors and political opposition that the IT Act is not a tool in government hands to 'sort out' recalcitrant investors or political opponents. Only then will demonetisation produce its desired outcome of ushering a new culture of honest economic activity in India.

Rajiv Kumar, Founder Director, Pahle India Foundation.