Demonetisation: Did it really work?

By Prof. SP Bhattacharyya

On 8th of November 2016 at 8 p.m., Prime Minister rendra Modi made the earth-shaking proclamation of demonetisation which rocked the tion to the core as never before. This was also claimed to be the single most revolutiory step taken by any government in the post-independence era in the best interest of the tion (with many more to come down the line). The immediate impact of the announcement was turally traumatic for ordiry citizens because in this materialistic world, practically everybody lives and dies for money and even equates god with money. People were given to believe  that demonetisation would bring the ‘black money’ out of circulation, a tentative estimate of which was said to be about 3 lac crores out of about 16 lac crores of paper money in 500-1000 rupee notes. After about 10 months since then, the first 3-4 months of which were of extreme pain and harassment for ordiry citizens, the success or otherwise of the so-called “mo’s Demo” has now come to light from the figures published by the R.B.I. recently. To everybody’s surprise, it is seen that almost 99% of the demonetised paper money has come back to the banks till now and only a paltry sum of  about Rs. 16,000 crores ( i.e., about 1% of the high denomition cash) has not come back yet.

Are we then to suppose that the black money component in the economy was grossly overestimated and all the black money, fake money, terror fund put together was no more than just 16,000 crores of rupees? Or, is it that demonetisation has only helped black money to come out in the open as clean money in the same dubious manner and clandestine channels through which these were generated in the first place? No wonder, some of the critics of demonetisation have likened it with the proverbial mountain in labour giving birth to a mouse though there is no dearth of platitudes from the government side that the measure was successful and the country would benefit from this in the long run without specifying as to how long the ‘run’ shall be. It is true that the success or failure of this so-called ‘surgical strike’ on the economy of the country in real terms shall be known only after a proper cost-benefit alysis is made when it is made. Till then, the proponents and opponents of the move will feel free to go about beating their own drums while the public bears the brunt of falling GDP under the twin affect of demonetisation & GST.

     Not being an economist myself, I, at this point would like to share my understanding of the concept of black money with other readers like me. In simple terms, it is that part of the country’s economy (in monetary terms) which do not show up in the fincial records of the government because of corrupt fincial deals such as giving and taking of bribe, evasion of tax etc. Usually, the possessors of black money do not keep this money in their hands (or drawers) for long but convert them into assets such as gold, land, real estate etc. which then become their legal possessions and can be used as instruments for generation of more black money through dishonest means. This process of generation, regeneration and expansion of black money economy has now extended to more and more unconventiol and corrupt economic activities such as election funding and horse-trading after every election. Also, in such a situation black money throws white money out of circulation which, in other words, means that white money essentially gets devalued.  

    Let us now try to understand how money can pass through alterte black and white phases even as it retains all the characteristics of a legal tender. For example, a 500 rupee note in my pocket per se may not be black money. Only the legitimacy or otherwise of the process by which it came to my pocket (or will go out of my pocket) determines whether at that instant of time it is in its black or white avatar. It is the ture of the footprints (black/clean) left by this piece of note on the country’s economy  as it goes through innumerable fincial transactions, some legal/some illegal, that either strengthens the economy or weakens it. Let us say that Mr. X earns 4 lakhs of rupees in a year from his employer in exchange of the services rendered by him. This is a perfectly legal transaction of money which will not generate any black money in the process. Now, if Mr. X is liable to pay an income tax of Rs. 10,000 on this income and he does not pay it, then this Rs. 10,000 retained in his hand is the black money component (however small) in the economy of the country. If Mr. X now buys a piece of land in a village from Mr. Y and pays Rs. 10,000 for it then this same amount in Mr. Y’s hand is no longer black and this transaction has not generated any black money; only Mr. X has successfully converted his black money into his legally owned ‘wealth’(black!) in the process.

    One must realise that black money in its currency form is only the tip of the iceberg so far as the black economy is concerned though it is the primary vector which spreads corruption in the society and debilitates the tion’s economy. It has been variously estimated by different agencies that black money converted into wealth constitutes nearly 50% of the country’s assets, the bulk of which is in the hands of only a few whom the so-called ‘surgical strike’ could not touch. It is only the ordiry people who do not understand the complexities of economics who believe that at last the government has shown the courage to dispense retributive justice to the crooks in the society and it is only a matter of time before they are caught and their ill-gotten wealth redistributed amongst the poor. However, it will remain debatable for a long time to come as to what was the real intent of demonetisation and whether better results could not have been achieved by applying less shocking remedies than the devastating ‘surgery’  carried out on the people of the country in the me of demonetisation.

(The author is Retd. Principal, AEC Guwahati)