Giving further credence to it was a report of the National Sample Survey Office’s Periodic Labour Force Survey, which showed that the unemployment rate in India had stood at 6.1 per cent in 2017–18, the highest level in the last forty-five years. Initially, the report was not made public and the government clarified later that its findings were not final. But the report became controversial as two members of the National Statistical Commission (NSC) had resigned alleging that the government had withheld the release of the report in spite of NSC’s approval.17 However, the report and its findings were confirmed to be final in May 2019, soon after the new government was formed after the general elections. Similarly, the Sixth Annual Employment-Unemployment Survey, conducted by the Labour Bureau showed that the unemployment rate (defined as the share of the labour force available for work, but unable to secure a job) had risen to 3.9 per cent in 2016–17, compared to 3.7 per cent in 2015–16, 3.4 per cent in 2013–14 and 4 per cent in 2012–13.18 In other words, the unemployment rate had risen to a four-year high. Even this report was withheld by the government and its release would be subject to further review within the government.
The RBI’s own finances too took a hit as a result of demonetization. Its cost of printing new currency notes went up to Rs 13,000 crore in two years after demonetization—in 2016–17 and 2017–18. Its cost of printing currency notes in 2015–16 was much lower at Rs 3421 crore. The additional costs led to RBI’s lower profits and reduced dividends to the government. Against Rs 65,876 crore in 2015–16, the RBI transferred only Rs 30,659 crore of dividend to the government in 2016–17. The following year saw an increase to Rs 50,000 crore. But the lower dividends, largely due to demonetization, strained the relationship between the Centre and the RBI over the quantum of dividends the central bank should transfer to the government—an issue that had to be adjudicated on by an official committee headed by former RBI governor Bimal Jalan.
Did demonetization impact the way Indians used cash in their dealings? And did it help the government in tracking black money? About a year after demonetization, the value of currency notes in circulation had indeed seen a drop. The data with the RBI showed that the notes in circulation at the end of 28 October 2016 (the last reporting fortnight before demonetization took place on 8 November) were estimated at Rs 17.54 lakh crore. This was about 13 per cent of India’s GDP for 2015–16.
By the end of March 2017, the total value of currency notes in circulation dropped to Rs 13.1 lakh crore and its share in GDP for 2016–17 was down to just 9 per cent, although critics pointed out that this drop did not signify much as the velocity of circulation increased even though the currency in circulation as per cent of GDP may have come down. Currency notes in circulation, however, started growing again after March 2017. At the end of 18 August 2017, notes in circulation rose to Rs 15.46 lakh crore, but at 12 per cent of GDP this was still lower than the 2016 end-October level and therefore represented a drop in one year.
But the situation changed somewhat by the end of March 2018, when the value of total currency notes in circulation rose to Rs 18.04 lakh crore. It was a sharp increase of about 38 per cent over the level that prevailed a year ago. A part of this increase was understandable. This was the period when the RBI had pumped in huge amounts of currency into circulation to relieve the shortage of notes in the economy. Economists described this as the impact of a massive remonetization exercise undertaken by the RBI in the wake of the November 2016 decision. But when compared to the GDP for 2017–18, the share of currency notes was still lower at about 11 per cent. India’s cash-to-GDP ratio was yet to cross the 13-per-cent-mark reached by November 2016.
Look at it another way, the annual increase in currency notes in circulation in the Indian economy in the five years before demonetization ranged between 10 and 17 per cent. If demonetization had not taken place in November 2016, the notes in circulation would have increased by another 10 per cent to Rs 19.3 lakh crore during a year after November 2016. Demonetization had clearly reduced the use of cash in the economy. The pace of growth in currency in circulation was checked, but given their steady rise in the months after demonetization, it would be only a matter of time before cash would make a comeback.
On the other hand, non-cash transactions saw a healthy jump in this period. On an annual basis, transactions under real-time gross settlements (RTGS) through banks rose by 21 per cent in 2016–17, compared to an increase of just 15 per cent in 2015–16. RTGS like the National Electronic Funds Transfer or NEFT is an electronic payment system which allows individuals or companies to transfer funds between banks into each other’s accounts, but within the country. Both the systems are run and maintained by the RBI. Such retail electronic payments saw a 45 per cent jump in 2016–17, up from 40 per cent in the previous year. A similar trend was noticeable in the use of credit and debit cards on point-of-sale machines, whose transactions in 2016–17 grew by 65 per cent, compared to 28 per cent in 2015–16. Pre-paid instruments too saw a 71 per cent increase in transactions, compared to a 128 per cent rise in the previous year.
The trend changed somewhat in the second year after demonetization. RTGS transactions growth in 2017–18 stabilized at the same level of 19 per cent. Retail electronic clearing, too, grew at a marginally higher rate of 46 per cent in 2017–18. But credit and debit card transactions value grew at a slower pace of 40 per cent and pre-paid instruments also saw a marginally lower growth rate of 69 per cent.
How well did demonetization do with respect to tracking black money? After one year of demonetization, the government pointed out that it had already used data analytics to identify about 1.77 million suspicious cases of deposits of cash with banks. The value of such deposits was estimated at Rs 3.68 lakh crore, deposited in 2.32 million bank accounts. Further analysis of such cases helped the government identify about 1,00,000 ‘high-risk’ cases for action. Tax compliance also improved in this period. The share of direct taxes, for instance, in total tax collections by the government had declined from 56 per cent in 2014–15 to 51 per cent in 2015–16 and further down to 49 per cent in 2016–17. But in the 2017–18, which captured the full impact of demonetization, the share of direct taxes recovered to 52 per cent. Direct tax collections too grew by over 14 per cent in 2016–17 and by 18 per cent in 2017–18. The direct tax buoyancy, a measure of efficiency and responsiveness of revenue collections in relation to growth in GDP, also grew at a healthy rate from 0.8 in 2015–16 to 1.81 in 2017–18.
The sharp rise in tax collections could be attributable not only to demonetization-triggered increase in tax compliance but also to the after-effects of the tax amnesty scheme announced in 2016 and the higher salary pay-out to government employees following the implementation of the Seventh Central Pay Commission. The 2016 tax amnesty scheme led to the declaration of undisclosed income worth Rs 65,250 crore in 2016–17 and a tax collection of Rs 29,362 crore inclusive of penalty. As seen in past years after an amnesty scheme’s launch, tax collections saw a natural rise. Similarly, the Central government’s salary bill for 2016–17 shot up by about 16 per cent to Rs 1.16 lakh crore and by another 10 per cent to Rs 1.28 lakh crore. Both the amnesty scheme and the higher salaries on account of the Seventh Central Pay Commission were also responsible for a jump in tax collections and an improvement in tax buoyancy.
Another indication of the rise in tax compliance was available from the sharp rise in the number of Permanent Account Numbers (PAN) issued by the government. PAN is a unique ten-digit alphanumeric identity, issued by the income-tax department to each taxpayer. At the end of March 2018, the total number of PAN issued to ten categories of taxpayers was 379 million, of which individuals accounted for 97.5 per cent of the allotted PAN or about 369 million. This represented a 28 per cent increase in PAN in just one year. In other words, between April 2017 and March 2018, a total of 85 million new PAN holders were added to the taxpayers’ community.
The number of tax returns filed in 2017–18 also increased to 68.4 million, 18 per cent h
igher than 54.3 million returns filed in 2016–17. Did demonetization help in the sharp increase in the number of PAN holders? There was no significant increase in PAN holders immediately after demonetization on 8 November 2016. The number of PAN holders in March 2016 was estimated at 246 million at the end of March 2016 and rose by just 16 per cent to 285 million by March 2017. But the increase in the twelve months after March 2017 was significantly higher at 29 per cent with the figure reaching 369 million by March 2018. It seems there was a delayed impact of demonetization in driving up the number of PAN.
Yet, demonetization disappointed hugely as almost 99 per cent of the currency notes that were annulled on 8 November 2016 finally made their way back to the banking system through deposits by individuals and enterprises. Of the Rs 15.44 lakh crore worth demonetized high-denomination currency notes in circulation as on 8 November 2016, an estimated Rs 15.33 lakh crore was returned to the RBI. This meant only about Rs 10,720 crore did not surface after demonetization. The Supreme Court had been earlier told that almost Rs 4–5 lakh crore of demonetized currency notes would not surface, suggesting thereby that this was the amount of black money which would be targeted or unearthed by demonetization. Even if that was only an opinion before the court, it clearly showed that the government had misread the effect of demonetization and Indians showed great ingenuity in gaming the system to deposit as much as 99 per cent of the high-value currency notes. Also, such a reading suffered from a flawed thinking that all cash is equivalent to black money. The government of course claimed that after the return of these notes it could now identify and check how much of this was illicit. Some action followed, though its pace and results were not very reassuring. In the wake of demonetization and the cash deposits made in November and December of 2016, the income-tax department had zeroed in on 23.5 lakh PANs. These accounts had shown post-demonetization cash deposits to be inconsistent with their income profiles. Statutory notices to only three lakh of these accounts were sent. Over 70 per cent or 2.1 lakh of all those who got such notices filed fresh returns and deposited additional tax of about Rs 6560 crore. The income-tax department later began following up the remaining cases, where no responses were received.19
But the question that is yet to be answered satisfactorily by anyone in the Modi government is whether all these gains in terms of widening the tax net increased digital transactions and detection of fake currency notes could not have been achieved without the huge disruption and output loss that demonetization caused to the Indian economy. Was a more sustained and steady campaign to achieve these goals better than the shock of demonetization, which as an India Today report20 noted had led to the death of at least 105 people in the ‘rush for cash across the country’? Was the pain from demonetization more than the gains from the exercise?
Dramatis Personae of This Tragedy
Who were the chief protagonists of the Modi government’s biggest disruption? Of course, Prime Minister Modi was the chief architect of the government’s demonetization plan. Modi may have been inspired by many presentations made to him in 2016. For instance, one such presentation from a Pune-based organization Arthakranti Sansthan suggested that high-value currency notes needed to be recalled and scrapped. The Sansthan, a non-governmental organization, claimed that one of its key members, Anil Bokil, shared his thoughts on demonetization with the prime minister at a meeting that lasted for about two hours. Bokil had been meeting Modi with his economic policy ideas quite regularly beginning in 2013, following it up with more presentations in 2014, 2015 and in 2016. One of the many suggestions Bokil had made was to recall and scrap currency notes of Rs 1000, Rs 500 and Rs 100.21
The name of Swaminathan Gurumurthy, a chartered accountant by profession and an ideologue of the RSS, has also figured among those who may have advised the government on demonetization. Just four days after Rajan announced his decision not to continue as the RBI governor beyond the end of his term on 4 September 2016, Gurumurthy came out with an article in the New Indian Express on 22 June 2016. Titled ‘Rajan: The Exit That Was Inevitable’, the article argued why Rajan did not have an adequate working knowledge of the Indian economy and, hence, was not suitable to run the central bank. He blamed Rajan for creating hurdles in the rollout of the Mudra scheme that would have facilitated the flow of loans to small businesses. One of Gurumurthy’s observations indicated that he was aware of the government’s plans on demonetization. He wrote:
The new finance is sourced in an unprecedented rise in cash holdings which have risen to Rs 15 lakh crore in 2015–16 with the share of high denomination notes in the total currency in circulation rising from 33 per cent to 85 per cent in 2015–16. These distortions were occurring under the very nose of Rajan. But he overlooked them, because he had never handled economies where banks do not control the entire monetary system.22
Once demonetization was announced, Gurumurthy defended the move, but criticized the manner in which it was implemented.
But the final onus of this highly disruptive action will rest on Modi. His address to the nation on 8 November 2016 highlighted the need to tackle black money, stop the funding of terrorists and attack counterfeit currency as the key reasons for demonetization. Later, he defended the move on grounds of digitization of transactions and improvement in tax compliance as also tax coverage. Politically also, Modi was under pressure to deliver on the black money front. His promise of repatriating the black money stashed away abroad by Indians for the benefit of the common man was not yet fulfilled as only a small portion of the black money kept in overseas accounts had been recovered. Accusations against him for running a government that favoured the big business might have made him uncomfortable. The crucial Uttar Pradesh Assembly elections were just a few months away. There was a need for a new political narrative. Demonetization made an initial impact on the people as a strong attack against black money—a move that would hurt the rich even though it might inconvenience the common man. Modi was also successful in propagating among the underprivileged classes that their economic sacrifice due to demonetization helped him deal a body blow to the rich and the black money hoarders. Politically, that narrative sounded very attractive and was perhaps responsible for the ordinary people ignoring all other adverse implications of demonetization.
Finance Minister Arun Jaitley and RBI Governor Raghuram G. Rajan were aware of the demonetization move. Both the finance ministry and the RBI were involved in the preparations for carrying out demonetization.23 But Modi was so determined to carry out demonetization that he must have ignored at least the advice he got from Rajan, who had indicated that the short-term impact of demonetization would be harmful.24 Modi was determined to spend his political capital on a move that he believed would position him as the biggest crusader against black money. Less than a week after the demonetization announcement, Modi appealed to the people to support his drive against black money and bear the pain for fifty days. He said on 14 November 2016: ‘I have only asked for 50 days. Give me time till December 30. After that, if any fault is found in my intentions or my actions, I am willing to suffer any punishment given by the country.’25 His political commitment to the idea was so complete that even after many months of its execution and the disruption it caused to the economy, ministers and officials in the government were wary of criticizing demonetization. Indeed, the government’s sensitivity to any criticism of its move to demonetize 86 per cent of the currency in circulation did not go down even after two years of the event. A report in The Hindu noted how in an unusual move the Union agriculture ministry withdrew a submission it had made to a Parliamentary Committee on finance earlier. The report that was withdrawn had noted how demonetization had affected millions of farmers.26 The agriculture secretary also talked about the stern action he had initiated against the officers who had allegedly sent in wrong inputs to the committee. A joint secretary and two directors in the ministry were served with a show-cause notice to explain their conduct.
In a certain way, demonetization became t
he yardstick for government officers and ministers on their stance towards the government. Those who made critical comments were considered opponents of the government, and those who supported the idea were not just favoured but even rewarded with decent postings. K. Subramanian, who became the chief economic adviser in December 2018, was a competent economist, but he had endorsed demonetization even before he had joined the government. Shaktikanta Das, who had to defend demonetization and oversee its implementation in 2016 when he was the economic affairs secretary in the finance ministry, was first made a member of the Fifteenth Finance Commission and a Sherpa for the Indian government at G-20 meetings. Later, Das became the governor of the RBI.
The Rise of Goliath Page 37