Finally, the RBI has deigned to release the cold hard facts on Demonetisation. Of Rs 15.44 lakh crore worth of currency denotified, almost all came back, save currency worth Rs 16,000 crore. The Central Statistics Office estimates India’s 2016-17 GDP to be Rs 151.84 lakh crore. That means black money worth 0.1% of GDP was extinguished. To achieve that, 1% of GDP was sacrificed, if we go by the Economic Survey’s estimate of the impact of Demonetisation on economic growth. Demonetisation has been a flop, as far as tackling black money is concerned.
But Demonetisation has been a big political success for the Prime Minister. People give him full credit for trying to rein in the illicit rich. And were willing to suffer some pain, if that would serve the larger public interest. Of course, those with black money held as cash, a tiny fraction of unaccounted wealth, ended up with somewhat less black money: you had to part with some of the cash to get it laundered through the accounts of those with nothing to hide. At some point, this cost was something like 30%.
Which means that Demonetisation had a redistributive effect. About 30% of the black money got redistributed to those involved in the money laundering transactions, many of them poor. And the balance got converted into legitimate money.
People do not appreciate losing any part of their income. Which is why they do not pay taxes. So being forced to surrender about 30% of the cash makes the class of cash-holders very upset with the government and its political leadership.
What Demonetisation achieved was to bring about a change in the support base of the BJP. The traders who traditionally supported the BJP and hoarded cash have turned lukewarm, but the poor, who have mostly voted the BJP only in anger against the Congress, see it is a party that hits the rich where it hurts them the most, and therefore, is a party of the poor. Demonetisation, in essence, was a clever way of using the class anger of the poor against the rich to shore up political support for Modi and his party.
Will that support evaporate, if it is demonstrated that this claim of championing the poor was built on false premises, that Demonetisaton did little to remove black money? That depends on getting the message home to the people at large. Popular communication has been Modi’s forte and that of his party with its hundreds of thousands of Whatsapp groups and their incessant propagation of news, fake and real.
The real measure against black money introduced by the present government is the Goods and Services Tax. But it is scarcely the present NDA government’s contribution. The GST has been in the making since VP Singh’s Medium Term Fiscal Policy (as one of its architects Shankar Acharya explained recently) in the mid-eighties. The BJP blocked the GST while the UPA was in power. And did a smart about-turn on it after forming the government, just as it did on the Indo-US nuclear deal.
To remove black money, the most fundamental requirement is to clean up political funding, which, today, comes from unaccounted sources, almost exclusively. Parties show income and expenditure of a few hundred crores while actually spending several thousand crores. The process of accumulating political war chests is corrupt and corrupting. On that there has been no reform.
The electoral bonds this year’s budget introduced are not even an eye-wash. They allow for lack of transparency on who funds whom, while such transparency is an essential pre-requisite in a democracy.
The RBI’s annual report makes it clear that Demonetisation failed to tackle black money and that the cost of churning the BJP’s political base has been shaving off 1% of India’s economic output.