To DeMo or Not to DeMo – An Ordinary Indian’s Perspective

08 November 2016 will be remembered in independant India’s history for a long time. It was the day when a few hours before midnight, Prime Minister Narendra Modi declared the Indian rupee’s two largest denomination notes – 500 and 1000 – to be made invalid at midnight, with the 500 rupee note replaced with a new one and the 1000 rupee note to be discontinued altogether. Possibly intended for an international audience, it was the Prime Minister’s first address in English on Indian TV channels.

This demonetisation of commonly used, high denomination notes would’ve sent shock waves to the sections of India’s business community preferring to conduct most of their transactions with unaccounted for cash. Not just them, the least well off sections of society were also put under great stress in subsequent months because their daily wages and day to day expenses were dependant entirely on cash.

No survey had been carried out to check this, but there are good chances that the large section of society consisting of India’s salaried people whose taxes are deducted at sources, were strongly supportive of this move. They have been paying taxes like all honest, responsible citizens should, knowing all along that there’s a large percentage of self-employed people who do not even file their tax returns.

Going by random street interviews shown on TV, lesser well off sections of society also seemed happy in spite of the hardships they faced during the initial months of demonetisation. Supporters of the move probably hoped that a colossal amount of illegal money will enrich government coffers and be used for the larger benefit of the country, or simply become useless, thereby “punishing” the promoters of black money.

The subsequent weeks saw serpentine queues of people standing outside bank branches and ATMs to get a rationed amount of cash for their day to day needs. TV channels, the sellers (in some cases, creators) of sensational news, had a field day spreading their crew across locations in many cities to give an ear to peoples’ experiences and opinions. The alignment of various media houses was along predictable lines – the usual suspects from mainstream media were selling the suffering of the common man and woman, and there were others who were telecasting supporting narratives and opinions of people on the streets.

The fifty days asked by the Prime Minister to stabilise the situation didn’t eliminate the hardship, although as the first two months passed, there was some easing of it. On New Year Eve, the Prime Minister announced the launch of BHIM, the government backed mobile application that could be used to make payments electronically.

Months passed and there were arguments off and on about the move. The entirely unexpected news came from Reserve Bank of India when it announced ten months after demonetisation that of the notes invalidated on 08-Nov-16, nearly 100% had found their way in bank accounts. This means that all those Indians who had illegitimate cash in hand, managed to legitimise it in spite of seemingly tight rules associated with deposit of cash from the day after demonetisation. So, what went wrong?

Clearly, the government’s controls were not tight enough for the creativity of tax evaders who used various avenues – conniving with jewellers, as reported here, here and here, and bankers from Axis and Kotak banks and even RBI – to legitimise their undeclared income. It’s heartening to note that these frauds were discovered and the arrests made. One assumes the money they were attempting to legitimise too didn’t find its way to various bank accounts. Collectively, these specific cases will account for a tiny fraction of the total illegitimate money that people were trying to legitimise. So, are these the only amounts of illegal money the government was successful in preventing the legitimisation of?

What was demonetisation intended to achieve and was it achieved?

For sure, one of the objectives of demonetisation was to bring a large amount of undeclared money into government coffers. It certainly achieved that!

It was intended to leave out in the cold the undeclared crores of habitual tax evaders. It failed almost entirely there.

Another probably was to expand the taxpayer base. One hopes that post-demonetisation, the government has all the big ticket depositors on its radar and they have no choice but to declare their incomes honestly (or mostly honestly!) henceforth. Whether they voluntarily do so or not is up to them but it certainly is up to the government to not let them off the Income Tax hook for the rest of their earning lives.

An objective closely related to reducing cash transactions was to encourage digital transactions, which are visible to the government. Looks like the government has achieved some success there. BHIM app too has become an option Indians want to exercise. But the shift from cash to electronic payments as a preferred means for Indian masses will require sustained promotion. A related benefit of this shift will be less money spent by the government on printing and replacing notes – a win-win for the government.

Another important short term success was the complete halt of the Pakistan-sponsored civil disturbance in Kashmir. Fake notes printed in Pakistan, as well as genuine ones paid to young Kashmiri men to cause daily insurgence suddenly became useless for the purpose.

Was demonetisation necessary at all?

It’s going to be impossible for someone with just basic understanding of economics to answer this, so I won’t even attempt it! I do believe though that it’s far too complex a transformation for the conclusion to be black or white. There will be legitimate arguments by both its supporters and critics.

My own view is that when people pay their taxes honestly that’s when sincere governments can pump the taxes back for the benefit of the people of the country. With just a small fraction of earning people paying taxes being the long term situation, the state of a country would be exactly the state India is in. When we visit foreign countries, many of us love and admire them for their beautiful cities, cleanliness, orderliness and ease of living. As income earners we need to honestly give our country its due for a long, long time before India can begin to show signs of being like some of those countries. Demonetisation of 2016 was a move to strive towards just this – honest declaration of incomes and payment of taxes.

Some questions no one in our hyperactive media is raising

While the passionate debate on merits and demerits of demonetisation continues, it is worth raising some questions associated with it. India has a serious problem of a parallel, illegitimate economy. This has been allowed to survive and thrive under decades of Indian National Congress (INC) rule, the last ten years of their rule seeing an economist Prime Minister and a Finance Minister who still thinks no end of his brilliance as an economist. Shouldn’t a balloon continuously filled with increasing amounts of a toxin have been controlled by these highly accomplished people? They never even admitted to fake 500 and 1000 rupee notes being blended by our neighbour into our colossal cash economy. Why are members of media, otherwise demanding some explanation or the other from politicians literally every night, not demanding answers from the INC on the existence and growth of black money and fake notes?

The uninhibited Chief Ministers of West Bengal and Delhi were the most vocal political opponents of demonetisation, citing hardships faced by the common man as their main reason. However if this was indeed so, demonetisation would’ve cost BJP dear in subsequent elections, and would’ve benefited a whole lot of other parties, including theirs. So why the widespread protests? Secondly, their opposition to demonetisation implied support for black money. But media did not question them on the dark side of their stand.

It is a sad reality that many people who were regularly dealing in black money till November 2016 continue to do so even today. In other words nothing has changed for them. The push to legitimise their transactions has been at least a partial failure, but no one is raising the point that corruption has become natural to us in spite of an extended invitation to legitimise cash transactions followed by a hard knock. Why don’t any of our newspapers or hyperactive news channels want a debate on INC’s ‘hand’ in making the black market a part of our national DNA?

Some non-economists’ arguments against demonetisation

While economists continue to have passionate arguments both for and against demonetisation, some people have presented anti-demonetisation arguments ranging from amusing to absurd.

One was those was concern over the time wasted by people in queues waiting to deposit or withdraw cash.

Queues have been part of Indians’ lives since half a century. Till as recently as the nineties, we have waited in queues to buy movie tickets, railway tickets, train and bus passes, at bus stops, outside sought-after colleges to receive admission forms, even to catch a glimpse of movie actors! If some anti-DeMo people are frowning over time lost waiting in queues for making deposits and withdrawals over two months, what do they have to say about time lost by Indians in queues over half a century? I’d also like to invite such people to experience time spent traffic jams in Indian cities like Bengaluru. Is no time lost there?

Another one was attributing the few deaths of people waiting in those queues, to demonetisation. Seriously? A country of 125 crore people spends countless person hours in queues every day. On what basis are these armchair critics relating a few deaths to the physical and mental stress caused by demonetisation, and not some factors unrelated to it? If the physical strain of waiting in queues kills people, one can’t imagine how many Indians would be dying every day!

What’s reasonable for us to expect from the government?

Now that demonetisation of 2016 is behind us, as people who have paid either with time or varying levels of hardships, what is reasonable for Indians to expect from their government?

It’s frustrating that people have quickly reverted to “cash only” mode after all the efforts by the Establishment and banks, and hardship faced by crores of Indians. It tends to make one say “It was of no use!” The government should follow the shock therapy with continuously incentivising, even compelling the switch from cash to electronic transactions. As a government-backed avenue to achieve this, BHIM needs to be popularised further.

The government has already declared the increased number of taxpayers who paid tax in 2016-17, partly thanks to demonetisation.

Thirdly, for the deposited cash that account holders or depositors have not been able to explain, have the government agencies interrogated them and are they keeping an eye on such peoples’ for their future income declarations? The former has not been widely reported, and the latter is a question that’ll be answered in future. Major tax evaders should have come in the government’s radar. The government should penalise them for evasion and keep a watch on their financial dealings so that these natural tax evaders do not have the option to reconstruct their old world. Not to a great extent, anyway.

Lastly, the government owes the people of India an explanation for deposit of nearly 100% demonetised notes.

Finally, to DeMo or not to DeMo?

There have been stray voices by Establishments outside India on the inclination to implement this move in their countries. So... should they or shouldn’t they?

India’s situation has been unique – by volume it probably has the largest amount of undeclared cash dealings anywhere in the world, it also probably has the largest number of tax evaders in the world. And in all probability, it has the largest number of people dependant on cash for their livelihood. By percentage of population, the ease of switching from cash to electronic means of payment is also very limited.

If any other country were to demonetise, the move won’t have as adverse an impact on its population as it has had on India’s. The preparation for such a move by their governments too will be less difficult than it was for ours. It’s for those governments to decide whether or not the problem of black money in their countries is big enough for them to make their people go through associated hardships. Lessons from India’s move can guide them well!

Meanwhile, as the first anniversary of demonetisation approaches, we Indians can sit back and watch with a mix of anger and amusement, the urban nautanki of our dark, destructive Opposition to protest the unconventional battle in the long drawn war on black money, which seems to have hit them much harder than they will ever admit publicly.