The Reserve Bank of India’s (RBI) commentary on demonetization in its Annual Report for 2017-18, released just a few days ago, has again triggered war of words between the government and the opposition at the centre. The apex bank has made some interesting observations regarding demonetization. Before taking a look at these observations, let’s have a look at the statement of the union finance minister Arun Jaitley in defense of the demonetization, which otherwise is said by the opposition to have ‘wrecked’ the economy. Even general public perception about the act pf demonetization has remained full of criticism, which forced the government not to talk about the act.
Jaitley, in a Facebook post, said that Demonetization formalized the economy by making it more tax-compliant.”When cash is deposited in the banks, the anonymity about the owner of the cash disappears. The deposited cash is now identified with its owner, giving rise to an inquiry, whether the amount deposited is in consonance with the depositor’s income.”
The statement of the finance minister is not misleading. But the interesting thing that has happened is that while formalizing the economy, the act has created fear psychosis among the general public where they are unsure about the safety of their hard earned money. This fear has pushed many of them into informal way of conducting financial transactions. And this goes against the spirit of mega financial inclusion programme of the government. Today the scenario is that people have bank accounts, but most of the accountholders prefer to keep cash at home to avoid hassle of tax inquiries etc. which they apprehend while depositing it in their accounts. So there is fall in deposits’ growth.
The RBI annual report also vets the fall in deposit growth. It points out that the “deposit growth slowed sharply after the post-demonetisation bulge of the preceding half and also reflected the pronounced deceleration in domestic economic activity in the first quarter of 2017-18.”
However, in addition to the fear psychosis prevalent in depositors, demonetization slowed down the economic activities considerably. We witnessed job losses and small & medium enterprises were hurt badly as the free flow of money got blocked due to demonetization which hampered their business activities.
Precisely, demonetization prevented money changing hands in a hassle free manner. This deprived people of earning capabilities and ultimately led to considerable slow down in economic activities. So, for saving money, people need to first earn it and that is difficult when economic activity has slowed down.
The RBI Annual Report has said that the processing of the demonetized notes has been completed. Rs 15.31 lakh crore worth of notes were deposited back into the banks. This made up for 99.3% of the demonetized notes.
There was an official statement from the finance ministry when demonetization was announced spelling out the idea behind demonetization to eliminate “Black Money which casts a long shadow of parallel economy on our real economy.”
However, in the process, everyone who had black money held in the form of cash, deposited money into the banks, and more or less got away with it.
Even use of high denomination notes was projected as a source for storage of unaccounted wealth facilitating generation of black money. But contrary to the logic to make it difficult for people to store black money in the form of high value notes, how does replacing a Rs 1,000 note with a Rs 2,000 note would help? We are yet to understand this ‘logic’ of demonetization.
Now coming to another ‘logic’ to increase digital payment transactions . This logic is accidental in nature as this was not mentioned when the prime minister announced demonetization on November 8, 2016. The RBI Annual Report says: “The use of digital payments, which had surged to a peak in December 2016 in the aftermath of demonetization fell back to the elevated post demonetization trend before rising in recent months.”
Basically, digital payments were growing even in pre-demonetization era and it would have grown any way.
The RBI annual report also counters the claim of the government which in support of demonetization had stated the new notes of Rs 500 and Rs 2,000 will be difficult to fake. In fact fake currency is growing.
Precisely, the RBI Annual Report throws an important question: Was demonetization an initiative of blunder?
(The views are of the author & not the institution he works for)
sajjadbazaz@greaterkashmir.com