Time to settle the Demonetisation debate

It is sad to see that, as a country, we are still “debating” demonetisation. This is dangerous, because we will never learn from mistakes unless we admit it first. So for those who are still “debating” for or against it:

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Summary

  • Demonetisation was a bad idea to begin with, incapable of achieving stated objectives even if done well
  • The bad idea was poorly planned and executed
  • None of the objectives were achieved as expected
  • The country has suffered massive damages
  • No lesson has been learnt, nor those responsible held accountable

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Let us first look at the stated objectives, as revealed during the Prime Minister’s now infamous address to the nation:

  • Fight black money and corruption
  • Fight terrorism
  • Fight counterfeiting

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Bad Idea?

Let us now look at why demonetisation idea was not capable of achieving the stated objectives even if it had been done well.

  • Black money: This is generated by either evading taxes or engaging in criminal activities. Black money thus amassed is mostly SPENT by the people who do these things. They spend it on large houses, fast cars, expensive parties, foreign travel. They also spend it for buying land, expensive metals, etc. They spend it on expanding their business which helps them make even more money. Rich people in India have been doing these for several generations. Only a small part of that money is kept in the form of CASH, mostly working capital. Losing that to demonetisation could have only caused these people a relatively small loss. Even that is temporary, since they can resume evading taxes or running drugs or whatever other skills they have once the notes are back.
  • Terrorism and insurgency: This is supposedly financed through smuggling drugs, extortions or from enemy countries. Demonetisation could have only caused temporary difficulties, and these can resume once the notes are back.
  • Counterfeiting: This has existed in every country since cash was invented. It is foolish if anybody thought it could be eliminated by printing notes with a new design. Counterfeiters would only lose their small “unsold inventory”, and would have to make some investment in new plates. Note that the new notes, apart from a new colour and design, have ZERO additional security features compared to the old notes.
  • Digital payments: (Please note that this was a reason invented later to try justify demonetisation.) Have you heard of governments stopping new land phone connections because the mobile phone was invented? Or oxen being banned because tractors became available?

Overall, demonetisation was a bad idea to begin with!

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Poor planning and execution

  • This is evident from the fact that they were nowhere near finished printing the new notes when the announcement was made.
  • The Rs. 2000 notes were printed for the convenience of printing. But it is inconvenient for day to day use of even the urban upper-middle-class Indians. This shows either an uncaring attitude or bad planning.
  • They had to change their deadlines and guidelines 42 times in 54 days, revealing their lack of planning, as well as adding to the people’s hardships
  • The UPI interface was months away from being ready, so people could not even use that.
  • Insider stories going around say that the PM was forced to make a pre-mature announcement when it became impossible for the large scale printing activity to be kept confidential anymore, again showing bad planning.
  • And thanks to the poor planning and execution, people found ways to recycle even the cash part of black money and the fake notes through the system and come clean.

So we have a bad idea which was planned and executed poorly!

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Objectives achieved?

  • Black money: We still buy goods without a tax bill. Drugs are still being sold. People still bribe politicians and government officials. We still pay a crore or more for a medical admission. Doctors continue to get kickbacks for ordering unwanted tests. A large number of people made a killing from a new business- exchanging old notes for new ones for commission, so successful that they were able to return 99.1% of the demonetised notes and get brand new ones.
  • Terrorism and insurgency: More civilians and soldiers than ever are getting killed in Kashmir. Reports are coming from the North-East of increased extortion by underground groups of local businesses and ordinary people, to make up for the funds lost during demonetisation. The historical, political and cultural reasons for these problems still exist unchanged!
  • Counterfeiting: Even the new notes are being forged now, as expected. In addition, we haven’t seen any reports of any large scale identification of fake notes among the old notes returned. If counterfeiting had been such a huge problem meriting drastic steps like midnight demonetisation, we can expect lot of fake notes among the notes returned by unsuspecting common people. Either there were actually not many fake notes, or they got ‘legalised’ during demonetisation! We don’t know the truth, which we will come back to.
  • Digital payments: Digital payments, being a new technology, was projected to increase exponentially even without any Government support. Lot of new customers were added during the disruption days, saving these companies thousands of crores in advertising and cashback offers which would otherwise have been needed to acquire so many customers. After a temporary, artificially created increase in demand, growth in actual digital transactions in the country went back down. This is likely due to the badly affected economy, thanks to all the disruption.

So none of the stated objectives were even close to being achieved, as expected.

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Damages

  • Media points out about 50 deaths with causes directly attributable to disruptions caused by demonetisation.
  • The economy nosedived, and GDP growth took a big hit at a time when the rest of the world was doing relatively well. There are people who argue that the GDP growth is back up. When you are going fast now, does that mean that you were not stuck for an hour in traffic earlier? You will still be one hour late!
  • Most badly affected were the poor (who did not have credit cards to swipe), the farmers (who could not sell their produce and could not sow the next crop), the small business owners (who lost business), etc. The rich went to their supermarkets, swiped their cards and went about their normal lives, mostly.
  • One of the real ways to curb black money and improve tax collection would have been to properly implement GST. This took a huge hit, because the entire government machinery as well as the businesses were fighting an artificial disaster when they should have been preparing for the transition to the new tax regime. GST was finally implemented without full preparation, there was widespread confusion, businesses and livelihoods were affected and even the tax officials were clueless. Unfortunately now the Government has been forced to relax many of the provisions, undermining the very benefits that GST was originally supposed to bring.
  • The damage of demonetisation is actually much more widespread and remains to be studied properly. Which brings us to our last section.

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Lessons not learned

Because we are still “debating” and have still not admitted that this has been an unquestionably lousy idea which was then implemented poorly, we are unable to learn any lesson from this huge historical mistake.

For example

  • If 99.1% notes have come back, where did all the black money go? How did the criminals and tax evaders recycle it?
  • Where are the counterfeit notes which was supposedly destroying this country? Did they also go back to the RBI and got converted to plywood? Or was it an imaginary problem?
  • And finally, the most important question of all- how did the Government of India led by its Prime Minister allow such a bad decision to be thrust upon the people of India? Who is accountable?

Then there are people who argue that demonetisation has already had secret benefits and more will flow, but you can see only if you are intelligent and look at it wearing special glasses. Maybe,but in the last two years I see only a naked king.

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P.S.: Oh, yeah! This is a very biased note. It discourages debate, does not cite sources, many numbers are wrong and uses fatalistic language intended to cement preconceived notions. For example, in reality, more lives were saved during demonetisation because people were standing in queues or sitting at home after losing jobs, rather than driving around like crazy without helmets or seat belts. (More than 400 people die each day in India in road accidents.) You are advised to think for yourself and form your own opinions.

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