Demonetisation: Success or Failure?

It is too premature to conclude if the Demonetisation scheme of the Government is a success or failure. This post brings to you the arguments on both sides, without attempting to arrive at a judgment.

(Before proceeding further, you can read these posts by Economyria:

Demonetisation of currency in India: Explained

The Impact of Demonetisation)

Demonetisation is a failure

1. According to the recently released RBI report, 98.86 % of the high-denomination notes that were demonetised have been deposited into the banks. Before demonetisation, the official estimate was that around 20% of the notes (which is black money) will not return. To put this into perspective, in the Demonetisation of 1976 and 1978, about 14 % and 10 %, of high denomination currency respectively did not return to the system.
2. The banned notes that did not return would have led to a reduction in liabilities of the RBI. This is because the currency issued is a liability for the RBI. Hence, it was predicted that the notes that did not return will have the impact akin to confiscation of money and this money could be used to recapitalise the banking system.
3. It was also expected that RBI’s dividend to the Government would increase due to a reduction of its liabilities as explained in the previous point. Instead, RBI’s dividend to the Government fell by half (Rs.30659 crore) in the year ended June 2017. This reduced transfer was due to increased expenditure due to demonetisation.
4. The increased expenditure was on account of the cost of printing currency post demonetisation and managing the logistics, which amounted to a whopping Rs.30000 crore.
5. RBI had to incur huge costs in paying interests. Post demonetisation, banks were flushed with excess liquidity. They made large deposits with RBI.
6. There has been no significant dent on corruption and terrorism.
7. The Indian economy grew at 5.7% in the June quarter 2017 from 6.1% in the last quarter. Though it is not sure that the decline in GDP growth rate is due to demonetisation.
8. Lastly, though the digital transactions reached a peak in November 2016 due to cash crunch imposed by demonetisation, it has been declining since. It increased to record Rs.957.50 million in November 2016 and gradually declined to Rs.862.38 million in July 2017. The Government has failed to sustain the momentum.

Demonetisation is a success

1. Demonetisation is only one of the many initiatives taken by the Government to root out black money. Others are Benami Property Act, GST etc. It cannot be analysed in isolation.
2. Even if close to 100 % of the notes have returned to the banking system, it does not mean that the black money has been converted into white. The  Operation Clean Money project was launched in January 2017 to scrutinise the deposited cash of the people.
3. The Government could identify lakhs of shell companies due to increase in their deposits post-demonetisation and launched a systematic crackdown against the black money generated by them. (Read more: All you wanted to Know about the Government’s War Against Shell Companies).
4. All money has been brought into the formal financial system. The Government has details of all those who deposited cash and so it is more difficult to evade taxes. It has led to increased compliance as well as tax revenues.

To conclude, we are yet to experience the long run to make an analysis on the impact of Demonetisation. Also, the Government failed miserably to assess the effects of demonetisation and hence, could not be credited for the collateral benefits of Demonetisation, but has to take all responsibility for its failure.