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The Truth About Demonetisation -Prabhat Patnaik
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After months of dilly-dallying the Reserve Bank of India has finally come out with the figure that nearly 99 percent of the currency notes demonetised in November 2016, came back to the banking system.

After months of dilly-dallying the Reserve Bank of India has finally come out with the figure that nearly 99 percent of the currency notes demonetised in November 2016, came back to the banking system. The total value of demonetised currency, in the form of Rs.500 and Rs.1000 notes, was Rs. 15.44 lakh crores, of which Rs.15.28 lakh crores came back to the banking system, which is 98.96 percent. Since a few small windows are still open for the return of demonetised currency, the final figure will certainly exceed 99 percent, which puts paid to the government’s claim that demonetisation would deal a crippling blow to the black economy.

This claim, it may be remembered, was based on the argument that while demonetisation would entail honest people depositing cash with banks, the black economy operators would not dare to do so, since they would be scared that questions would be asked about where they got all the cash they were coming to deposit. The absurdity of this argument now stands exposed. According to this argument the test of the success of demonetisation in crippling the black economy lay in the fact of demonetised currency not coming back to the banking system. A figure of Rs.3.5 lakh crores was mentioned as the amount which the government expected not to come back to the banking system.

Indeed on the basis of this expectation, all sorts of claims were made at the time: that this amount could be simply distributed among the people, since the RBI’s reduced liabilities, owing to the disappearance of this amount of currency, could be made good with impunity by printing equivalent new currency; that this amount could be simply given to the government for spending through the budget without any additional debt being incurred on its part; and so on. Well, it now turns out that that the value of currency not returned till now is only a paltry Rs.16000 crores, and most of it no doubt from honest people who could not meet the deadline for turning in their old currency notes: it amounts in other words to a sheer loot of honest people by the government.

But even this is not all. The cost to the RBI of printing new currency, and of mopping up, through Reverse Repo operations, the unwanted liquidity of the banks, which had to pay interest on deposits that brought in this liquidity without earning anything in return on such liquidity, was Rs.30000 crores. This was far in excess of the Rs.16000 crores that was snatched from the people. The RBI which is supposed to have got enriched by demonetisation, thus ended up incurring a net loss on account of this exercise, which entailed a loss of fiscal resources.

An enormous shock was thus administered to the economy for no rhyme or reason. It dealt a heavy blow to the informal economy; it boosted unemployment among the poorest segment of labourers; it caused massive hardships for common people who had to stand in endless queues to get just a fraction of their own earnings that had been deposited with the banks; it caused the deaths of 103 persons; and it led to a net loss of fiscal resources. The excuse for all this, that it would cripple the black economy, was palpably bogus to start with; its bogusness is now exposed by the RBI’s own data.

But the government’s temerity it would appear knows no bounds. Finance Minister Arun Jaitley who till the other day was gloating over figures of how much money he expected to be disabled by demonetisation, has now done a complete about turn, and is celebrating the figures of how little has been disabled. The success of demonetisation he now claims consists not in the fact that demonetised currency did not return to banks, but in the fact that it did. Demonetisation according to him succeeded in “flushing out” currency from the black economy operators who were forced to deposit it with banks.

Now, if black economy operators simply exchange old notes for new ones, then that does not hurt the black economy one iota. Jaitley’s argument would have some basis if two conditions were satisfied: first that black economy operators who deposited old notes could not obtain new notes in exchange; and second, that black operations demanded exclusively currency transactions. Neither of these conditions holds. But let us for argument’s sake assume that all transactions by black money operators have to be carried out exclusively through currency notes. (This is obviously untrue, for when a black money operator buys an air-ticket for himself, he does not pay for it with a wad of currency notes; but let that pass).

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