On the evening of November 8, 2016, Prime Minister Narendra Modi made an unprecedented 20-minute speech on national television promising to end the stranglehold of black money in the Indian economy, staunch the flow of terrorist funds from abroad, end fake currency circulation, push digital payments and bring windfall gains to the government in terms of destroyed currency notes. The panacea of all these ills was demonetisation — all existing Rs 500 and Rs 1,000 notes as illegal.

Twenty-one months on, and with nearly 99.3% or Rs 15.31 lakh crore of the notes back in circulation,  demonetisation—touted as one of the government’s biggest economic reforms—has not only failed to achieve any of the stated objectives, but has left a trail of destruction in its wake. The move virtually decimated the country’s large cash economy, and therefore the livelihoods of many small and marginal farmers dependent on cash payments, smaller businessmen and distributors, shopkeepers and traders, and also piled untold miseries on the common citizen.

Not only did the Reserve Bank of India’s (RBI’s) annual report, for the year ended June 2018, point out high percentage of notes being back in circulation, but it also put to rest the dangers of counterfeit notes destroying the country. In the past four fiscal years (F15-FY18), the collective value of counterfeit Rs 500 notes was only Rs 49 crore and that of Rs 1,000 notes was another Rs 63 crore.

The findings of the RBI has resulted in a war of words between the ruling National Democratic Alliance and the opposition on the merits of demonetisation. Congress president Rahul Gandhi has even accused Prime Minister Narendra Modi of intentionally inflicting demonetisation on the people for the benefit of 15-20 crony capitalists and his friends.  Terming demonetisation as the “biggest scam” in the country he said that “Modi has achieved what nobody has done in 70 years—he has finished off the economy”. Others point to the fact that many people may have used this opportunity to convert their black money into white—thereby turning the move into an easy vehicle for money laundering.

While that may be more of political rhetoric than reality, it is clear that demonetisation did cost the economy between 1.5 % and 2% of the GDP, according to economists such as Sunil Sinha, principal economist and director, Public Finance, India Ratings & Research. “It was a lost opportunity because had demonetisation not happened, India could have achieved 9% growth,” he says. Moreover, as the RBI report points out, that even the new currency notes are being forged and digital payments, after an initial surge because of the absence of cash in the system, has gone back to the levels witnessed before the note ban.

Meanwhile, finance minister Arun Jaitley has defended the move. The “larger purpose of the demonetisation was to move India from a tax non-compliant society to a compliant society. This necessarily involved the formalisation of the economy and a blow to the black economy,” Jaitley has written. To buttress his argument, he pointed out that the number of income-tax returns filed has increased from 38 million in March 2014 to 68.6 million in March 2018. The number of returns filed after demonetisation increased in the past two years by 8.5 million and 10.7 million, respectively, and nearly 1.8 million depositors have been identified for further enquiry.

Soumya Kanti Ghosh, State Bank of India’s group chief economic advisor, in a recent paper too finds a case for demonetisation. As a result of “Operation Clean Money” the number of returns filed as on July 31, 2018, stood at 34.3 million, a 53% jump over the 22.4 million filed a year ago. Ghosh says assuming that 75% of such returns are for zero income and 25% pay a minimal Rs 5,000 as tax per month, then the government would earn an “extra tax revenue of around Rs 300 billion (Rs 30,000 crore)”.

Others, point to the fact the government now has complete data on the bank balance of each and every individual in the country. “So today every rupee has an address,” says an economist who refused to be identified.

But the real issue today is whether there was a need for such a debilitating measure as demonetisation to bring more people under the tax net or reduce the scourge of black money, which is essentially what the exercise has achieved. A carefully crafted tax policy, simplifying procedures and rules, reducing tax rates and removing exemptions, and setting up of special courts to dispose of tax disputes faster, could have achieved the same goals with much lesser pain and turmoil.

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