“No relatively healthy economy has ever carried out demonetization” (Vivek Kaul, 2017).
Two years after India’s demonetization scheme more hardship than benefits have been recorded. Initially, the course was to eliminate tax evasion and money laundering while encouraging digital payments and preventing the circulation of fake notes.
Although honorable motives, demonetization has hardly affected the top two goals. Indeed, 99.7% of the banned notes were exchanged for new ones, putting into question the proportion of “black money” believed to have been circulating in the country. In fact, last year after tax department raids, undisclosed income was higher than prior to demonetization. Apparently, the government has not yet managed to deter corruption or the generation of “black money”. In addition, about 2 years are needed to fully process the recycling of demonetized cash. To date, demonetization only resulted in extra costs to banks for cash collection, storage and movement but especially for the re-calibration of ATMs, as the new banknotes have different dimensions than the formal ones.
Economic growth declined to 5.6% in April-June 2017 compared to 7.9% for the same period a year before. More than 100 lives were lost in the panic to exchange the notes. Millions of daily-wage earners missed their livelihoods and thousands of small businesses were closed. About a year of economic growth was lost. To solve the country’s unemployment issue, India needs 8% annual GDP growth for 20 years. It is only recently, in the last quarter, that India finally bounced back to a record 8.2% – the fastest pace of any major economy – two years after demonetization
The good news is that tax revenue did increased to 21% in the year 2017. The Finance Minister forecasts to meet the deficit target of 3.3% of GDP. In fact, tax income partially grew due to the 10.1 million newly added taxpayers compared to the average annual rate of 6.2 million in the previous 6 years. India still has a way to go since its tax-to-GDP is lower than the global average, but it’s a step in the right direction.
So the question remains, two year on, whether demonetization truly achieved what Narendra Modi hoped it would. Tax evaders and money launders have clearly not been affected by the scheme. Digital payments, although temporarily adopted, were quickly replaced by cash as it became once again available increasing from 17.9 trillion rupees before demonetization to 18.5 in August 2018. The one thing that has improved however, is the drop in counterfeit notes. According to data from the Reserve Bank of India, “no high quality counterfeit new currency notes have been seize by any agency post demonetization, and those seize in the recent past are scanned or photocopied notes” (Bloomberg). But then again it’s a question of priorities: was the loss of lives lost and the perpetuation of hardship – especially for the most vulnerable echelons of society – worth the drop in counterfeit notes only?