Every policy decision undeniably has its pros and cons, for some class or other in the economy. The same applies to demonetization. There’s no dearth of opinions on the negatives voiced out by the Lutyens’, band of foreign-trained economists, and the opposition unequivocally. This piece is an insight which weighs whether the criticism is well-intended or well-rooted in welfare of "We, the people" of India or Indian economy as a whole.

I write today on the second anniversary of a key policy decision in the war against black money - demonetization. Demonetization, for its impact analysis, cannot be studied in isolation with the other slew of measures undertaken by the incumbent government since 2014. Formalising the Indian Economy is a sine qua non to increase the ease of living for common masses. Financial inclusion was an important step to ensure that even weaker sections became part of the formal economy. PM Jan Dhan Accounts have resulted in almost every family, irrespective of their economic status to be become a part of the banking system.

Demonetisation was long overdue. Cash-to-GDP ratio which was less than 10% in 2001 had risen  to 12% in 2014. This had been facilitated by growth in high denomination currency (as high as 87 per cent). Overall, this had led to distortions in the economy, especially in real estate, gold prices, lending to small businesses, etc. Cash has interspersed deeper leading to what is called the ‘wealth effect’, which has been distorting the economy via operation in a parallel economy. The ‘bubble’ is eminently omnipresent and had led to rise in prices, be it in stock market, real estate, market prices, etc.

Black money is stacked both outside and inside India. Simply stated, any money which is not accounted for is black money. India has largely been a cash dominated economy. Cash transactions entail anonymity on both ends. It bypasses the banking system thus enabling its possessors to evade tax. Demonetization compelled cash-holders to deposit their holdings in higher denominations of Rs. 500 and 1000, thereby compelling the entire cash in circulation to be returned to banks for re-estimate. Modi-baiters have been baying for his blood ever since the Reserve Bank of India said 99.3 per cent of the demonetised notes aggregating to a mammoth Rs 16 lakh crore have found their way back into the banking system. Thus, they proclaim proudly that the entire exercise was futile and a failure. This is an ill-informed criticism.

The entire purpose of demonetisation was to trace and tax wealth. As many as 18 lakh depositors are facing the heat of the IT scrutiny, many of them under the Prohibition of Benami Property Transactions Act, 1988 (benami law). Furthermore, the government has started proceedings against the promoters of approximately 73,000 companies that are suspected of fraudulent transactions in the wake of demonetisation.  It was reported in May 2018 that the Corporate Affairs Ministry had identified around 2.25 lakh companies which did not submit regulatory filings for 2015-16 and 2016-17. They were alleged to function as ‘shell’ companies that are used to hold and transfer unaccounted wealth. Punitive action has been initiated against the account-holders and the shell companies identified in the process.

Getting the cash into the formal economy and making the holders pay tax was the broader objective. The system required to be shaken in order to make India move from cash to digital transactions. Unified Payment Interface (UPI), launched in 2016 has facilitated zero-cost real time payments between two sets of mobile holders. There has been a spurt in the volume of transactions from Rs. 0.5 billion in October, 2016 to Rs. 598 billion in September, 2018. Later, Bharat Interface for Money (BHIM) app launched by the PM has enabled quicker, zero-cost payment transactions using UPI. The value of BHIM transactions has gone up from Rs. 0.02 billion in September, 2016 to Rs. 70.6 billion in September, 2018. The share of BHIM transactions in overall UPI transactions is at about 48% in June, 2017.  RUPAY Card is used at Point of Sale (PoS) and for e-commerce. Its transactions have increased from Rs. 8 billion before Demonetization to Rs. 57.3 billion in September, 2018 for PoS and from Rs. 3 billion to Rs. 27 billion in e-commerce. All of this has given enough woes to Mastercard and Visa to complain.

The latest World Payments Report released by Capgemini and BNP Paribas, noted that Global non-cash transactions grew at 10.1 per cent in 2016 with Asia being the chief driver of this growth. While the adoption of mobile payments in India grew by 33.2 per cent, it increased at a slower pace, at 25.8 per cent in China. The report attributed the higher-than-expected rise in non-cash transactions in 2016 to the Indian governments demonetisation program. It has also praised the NDA governments flagship scheme, Jan Dhan Yojana which provided a free Rupay debit card to millions of previously unbanked Indian citizens and brought them into the digital payments fold for the first time.

The impact of Demonetization has been felt on collection of personal income tax. Its collections were higher in Financial Year 2018-19 (till 31-10-2018) compared to the previous year by 20.2%. In May 2014, the total number of the filers of income tax returns was 3.8 crore which has increased to 6.86 crore in May 2018. Demonetization and subsequently, implementation of the GST has curbed cash transactions at a massive scale and instead boosted digital transactions. Now, the actual consumption of goods and services is being recorded on real-time basis. This has given a buoyancy to the indirect tax growth in the economy. Reportedly, the Indirect tax to GDP ratio has increased from 4.4% to 5.4% from the 2014-15 to 2017-18.

Interestingly, despite reduction in tax rates, increased tax reliefs and exemptions, tax collection has risen unprecedently.  Today, an income tax relief of Rs. 97,000 crore to smaller tax payers and a Rs. 80,000 crore relief to the GST assesses, tax collections have risen; both direct and indirect tax rates have been reduced, GST rates on as many as 344 commodities have been slashed and many more measures for the relief to taxpayers have been taken. All of this could have effectively taken a toll on our ex-chequer. For GST, tax payer base increased from 6.4 million in the pre-GST regime to 12 million tax payers in the post-GST regime. Still, our tax base has expanded like never before and tax collections have bulged up.

Over and above all of this, the FICN (Fake Indian Currency Notes) in circulation that is not being counted is a large figure of 16.6 lakh crores, which was otherwise a direct threat to the security of India. Interestingly, there was a sudden halt to the stone-pelting continuing in Kashmir. The new currency had eliminated counterfeit currency, for the time being. Accordingly, the funding made to the LWE (Left-Wing Extremists) was through cash mode. All of this had stopped, no sooner than the cash was deposited in the banks, thanks to demonetisation.

Additionally, putting a ceiling on the initial withdrawal amount has led to the Money Multiplier effect. To understand this, let us take an example. If Rs 10 lakh crores exist in economy in the form of cash, it just stays as such, i.e. as Rs 10 lakh crores. However, if the same amount is deposited in banks, because of the fractional reserves basis (CRR and SLR), this Rs 10 lakh crores can become Rs 30-40 lakh crores. Money availability for lending is thereby tripled or quadrupled, hence lending an impetus to the investment capacity along with a reduction in interest rates. Thus, the SME (Small & Medium scale enterprises) have everything to gain. In all, this has given a boost to the Indian economy.

Government has effectively used these resources for creation of infrastructure over the past 2 years. Today, we have increased connectivity (road, rail, internet, airway & waterway) to distant corners of India. Electricity in every village, 92% rural sanitation coverage, spectacular PM Awas Yojana (Housing), cooking gas connection to 8 crore poor families, ten crore families covered under Ayushman Bharat, 50% increase in MSP, Mudra loans to 13 crore entrepreneurs and a number of other schemes which have dramatically led to a lift in living standards of the impoverished. UID (Aadhaar) has further ensured that via the Direct Benefit Transfer scheme using the J-A-M trinity (Jandhan – Aadhaar – Mobile No.) the subsidy/other benefits to directly reach the beneficiary (into his/her bank account) without any leakages.

Acknowledged, that the exercise led to difficulties for the next 50 days. However, what needs to be understood is that, at times, an antidote though bitter is quintessential to cure the maladies, infections and diseases. What PM Modi announced on 8th November 2016 at 8 pm in his address to the nation was the injection of a similar bitter antidote to make Indian economy pest-free, to kill the parallel economy and to make Indian economy robust and healthier.

So, the mantra remains: less informalisation more formalisation, less cash more cashless and digitalisation, less corruption more revenue, more resources for the poor, better infrastructure, and overall a better quality of life. We needed a strong man of iron will with guts to take the dare and thankfully we got one in 2014, who took the historical call.