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It was the suddenness of demonetisation that added immensely to its costs, and nothing to its benefits -Shankar Raghuraman
-The Times of India blog

Whatever its critics may say, there is one unambiguous achievement of the demonetisation drive. The Reserve Bank of India can surely now claim its rightful place in the Guinness or Limca books for the world record in time spent on a single count of currency notes. But what about the other benefits that the finance ministry claimed after RBI announced the results of this mahayajna of counting?

The ministry says the number of income tax returns filed in 2016-17 was almost 25% higher than in the previous year. This sounds impressive, but is hardly unprecedented. In 2011-12, for instance, the number grew by over 80% and in the next year by over 30%. Clearly, it is possible to achieve a dramatic increase in the number of those filing returns without the shock and awe of a midnight demonetisation.

It has also pointed towards the ratio of physical savings to financial savings tilting in favour of the latter. Again, this is hardly novel. There have been long periods in the recent past when households have chosen to hold more in financial assets than physical assets interspersed with periods where the reverse held true. Also, the trend from physical to financial savings has been in the making for a few years now.
Increased digitisation of transactions is also cited by the supporters of demonetisation as an achievement. The fact, however, is that after an initial spurt in the November-December period when cash was hard to come by, the volume of digital transactions has actually steadily shrunk from that high.

Let us, nevertheless, grant for the sake of argument that all of these claimed benefits could not have been achieved without scrapping the old 500 and 1,000 rupee notes and that they are here to stay. That still leaves us with a key question.

The question is whether any of these claimed benefits would not have been achieved if the demonetisation had not been sudden. Had the government announced that the old high-denomination notes would be, say, valid only for three months, would any of these benefits been negated?

This question is important because the costs of the exercise were largely due to the suddenness of the move. An economy suddenly starved of 86% of its cash cannot but face some paralysis, even if only temporary. The hours spent by millions in lines, job losses and all the other stories of misery we encountered in those 50-odd days and later were because cash had suddenly been sucked out of the economy. The cost in terms of reduced GDP too flowed from the ambush strategy. Even if we put that at the conservative 0.25-0.75% of GDP that the Economic Survey indicated, that’s somewhere between Rs 38,000 crore and Rs 1.1 lakh crore.

So why did the government decide to make demonetisation an ambush? On the evening he announced the decision, the prime minister insisted that “secrecy was essential for this action”. A couple of weeks later, at a book launch, he reiterated the need for catching people by surprise. “The criticism is that the government was not prepared. Their pain is that they were given no time to prepare,” he gloated.

Obviously, the idea was to catch those hoarding cash – presumably black income and wealth – off guard. Indeed Modi’s remark in his November 8 speech that “the five hundred and thousand rupee notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper” makes that evident.

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