Demonetization Is Successful!


Main reason for money coming back was that people with ill-gotten wealth were forced to deposit with banks and now have to face the music from the taxation department


On the morning of November 9, 2016, the mood of the nation could be summed up in one word: Bewilderment. PM Narendra Modi’s decision to cancel the tender of 85 percent of currency in circulation was greeted with delight in some quarters and anger in others but the overwhelming feeling was one of bewilderment. The educated few with interest in global affairs were equally bewildered by the decision of people in the world’s oldest democracy to elect Donald J Trump as their next president but the rest of India’s attention was focused elsewhere.

If the BJP and its supporters thought that ‘notebandi’ would be a tremendous success, people’s experience of its implementation in the first few weeks would have left them nervous and agitated. The long queues, the cash crunch, the collapse in economic activity were not good tidings especially if you are going to fight elections in the country’s largest state in a few months. Political condemnation of the move was to be expected. After all, no party wants its money generating operations to be affected and other party to get maximum mileage, but the surprisingly virulent condemnation of the move from the media intellectual elite in Delhi and other cities told a different story. Nearly a year later, the same intellectual class that told you Demonetization would be a political disaster and latched on to charade that was the Akhilesh Yadav Rahul Gandhi bandwagon during the UP elections are now crying `Demonetization debacle’ and promoting the myth that it was a failure after the release of the RBI annual report. The political and intellectual class, the same class that could not read the political tea leaves in favour of Demonetization and compared notebandi with nasbandi, is now telling you that the exercise is a failure. Bear this in mind as we explore the political impact and the continuing positive economic benefits of Demonetization.

Politically, the move has been a grand success. The massive win in UP, Nitish Kumar’s return to the NDA fold, the silent and sometimes not so silent support given by other parties like the BJD, the NCP , the YSR Congress to the BJP; All this would not have been possible without Demonetization’s tremendous popularity among the masses. Very often, political parties win largely through the support of floating voters. They have some committed support but sustained political success comes only by converting the floating voters into a committed support base. This is achieved largely through populist means or a complete economic transformation. PM Modi, whose political acumen is far sharper than most politicians both within and outside his party, knew this very well. He knew that the 2014 victory would be considered a fluke if he did not take steps to convert all that floating support he received in 2014 into permanent, committed support.

Demonetization was the key to this conversion and the political results have been spectacular.

Critics of Demonetization make two major arguments against it. One, that it was expensive, ill-timed, unnecessary. Second, that it did not root out black money and the move has failed since all the money has come back. There is one major counter argument to this. The Modi government has taken a number of initiatives to root out black money. Demonetization is just one of them. The others are the drive against benami property, GST, the push towards a less-cash economy. You can’t analyze or fully appreciate the black money crackdown by only focusing on Demonetization. It is a major move all right but one of the many aimed at rooting out black money.

Second point. The big number on Demonetization is not the amount of money that has come back into the system. It is the amount of suspicious transactions that have been uncovered by the banks, the RBI after the deposits. This amount, according to various estimates, is about Rs 1.6-1.7 lakh crore. Bear in mind that money doesn’t become white just because it is deposited in banks. The money leaves an address, a trail. The depositors become known to bankers and the income tax department. Suppose businessman A has rupees one crore of illegal money stashed away in his house. He is forced to deposit it in his account but this does not mean he has escaped scrutiny. The tax department can now go after him and unearth his income and financial transactions for the year and demand appropriate tax. Not only that, they can also question his income of previous years’ income and demand tax on that. They can go after any benami property he has. There is no escape once you become known as a tax evader.

PM Modi’s move to give a short window of four hours on November 8 was a master stroke. It ensured that the guilty could not escape and had to show them. The main reason for the money coming back was that people with ill-gotten wealth did not know what to do. They were forced to deposit with banks and now have to face the music from the tax guys. Is this not a major move against black money? Demonetization economic benefits are only beginning to tell. The rise in digital transactions, the transparency and reduced corruption caused by less use of cash and the widening of the tax base all means that India is in the midst of a major clean-up. The corrupt will no longer be able to hide. That’s the big message from Demonetization and the other black money initiatives.