A year after the withdrawal of 86 per cent of the currency in circulation in one fell stroke, opinions remain sharply divided on whether the move has been beneficial or not. Even with the ruling party celebrating the first anniversary of demonetisation as ‘anti-black money day’ and the Opposition as ‘black day’, it is now becoming increasingly apparent that the truth lies somewhere in between. To take the negatives first, a growth slowdown since DeMo stares us in the face, with even its ardent supporters now speaking in terms of ‘short-term pain for long-term gain’, as opposed to their earlier prediction of a rapid recovery. With GDP growth in Q1 of 2017-18 at 5.7 per cent, against 7.9 per cent in the corresponding period last year and just 6.1 per cent in Q4 of 2016-17, it cannot be denied that the economy — more so the rural sector, which posted a growth of 2.3 per cent in Q1 2017-18, against 2.5 per cent in the corresponding period last year, despite record foodgrain output in 2016-17 — is in trouble. As BusinessLine reports, prices have crashed in major markets for kharif crops such as maize, green gram, groundnut, soyabean and sunflower despite their output being either flat or marginally lower than last year, primarily because of the disruptive impact of the withdrawal of cash on supply chains and inventories. This price depression has been a trigger for farmers’ protests across the country. Manufacturing as a whole, as well as MSMEs which account for 25 per cent of the GDP, do not seem to have fared any better, with Q1 manufacturing growth at 1.2 per cent, against 10.7 per cent in Q1 2016-17. There is a looming jobs crisis, acknowledged even by voices in the Government and the BJP.
But this is not the whole story. As DeMo advocates suggest, some of this disruption was to be expected, given the entrenched role of black money. There is more than a grain of truth in their assertion that DeMo has rung in a climate of tax compliance, even if through coercive means. Even as 99 per cent of the ₹15.44 trillion that was ‘demonetised’ finally returned to the banks, it cannot be said that the crackdown on black money failed altogether. Deposits worth nearly ₹3 lakh crore are under the scanner, while an additional nine million people have, according to the Finance Minister, come under the tax net (strangely, way above the Economic Survey ’s estimates). Over 200,000 shell companies have been deregistered. Real estate shenanigans have been reined in.
The debate on DeMo is about ends and means: whether the same outcomes could have been achieved with less pain. The criminalisation of the entire cash economy seems unfair, as is the assertion that the reduction in cash to GDP ratio is an unqualified good. Cash plays a significant role in developed economies such as Japan. DeMo could have been implemented in a gentler way — with ‘nudging’ rather than bureaucratic diktat.