At eight o’ clock in the evening of November eight- 2016, as all eyes were fixed on America voting to elect its 45th President, half way around the globe, India experienced an economic earthquake. The Indian government invalidated eighty- six percent of the rupee notes in circulation with immediate effect from the stroke of the midnight. In a largely cash intensive developing economy, the sudden and unexpected ‘demonetisation’ decision reached Indians in farthest of corners and from every walk of life- the rich, the poor and the middle class, like thunder through a lightening rod.
Immediate after effects. For the following fifty days after the momentous decision, there were long queues at the ATMs as well as in many cases severe shortage in cash availability and its supply in rural and other geographically far flung areas ares of the country. The public, though inconvenienced, saw the move, by and large, as a clear, unambiguous and decisive step, by the government, against illegitimately acquired wealth stacked up by the rich and powerful.
Looking with advantage of hindsight. Now over hundred days later, the short term hassles to the public, exacerbated by the logistical nightmare of printing millions of new currency bills and quickly stacking up the ATMs in far flung towns and villages, is fading way. the process of ‘Remonetisation’ is nearing completion.
Impacts of demonetisation can now be more rationally analysed in policy circles away from the rhetoric and even rumours and disinformation that is bound to crop up following a decision of such financial magnitude and economic depth. To many Indians, the immediate experience was on clearly one of discomfort. However, now several facts can be ascertained and hopefully some value judgements drawn about the impacts made and the lessons learned from this unique experience in the financial history of the world.
- An opportunity to come clean for most Indians. India is infamous for being a largely tax non- compliant society. Tax to GDP ratio is a definitive indicator of the willingness of the tax payers to pay taxes and the fiscal capacity of the revenue authorities to extract the due taxes. India’s tax to GDP ratio is an abysmal 16.6 per cent. This is much lower than the OECD average of 34 percent. Additionally, the number of personal income tax taxpayers is about 12.5 million which is close to less than one percent of the country’s total population of about 1.3 billion. Demonetisation by accounting for the currency in circulation has provided opportunity for a major section of such persons and businesses that deal in cash but prefer to stay out of the tax- net. By avoiding a witch- hunt and by being accommodative, the revenue authorities can ensure that a large jump in number of tax-payers can be sustained in future.
- The number of organised crimes has nosedived. Organised crime syndicates avoid detection by operating through a sophisticated network of nodes transacting though cash to avoid detection and tracking by law enforcement authorities.
There has been a marked reduction in number of incidents characterised as ‘internal security challenges’ for the Indian state. Insurgency movements in the border regions of north- eastern provinces, local support for violent street protests in the vale of Kashmir, Maoist inspired violent communist movements in central Indian states all came to a noticeable and grinding halt following the demonetisation move. This has demonstrated a deep linkage between the incidents of disruptive, violent movements and their dependence on steady supply of cash currency to sustain movements and retain cadres.
- Indian economy has not collapsed. There had been a genuine concern among many leading international economists that in the short to medium term demonetisation would result in a sharp fall in the gross domestic product (GDP) growth in India. Opposition leader and former Indian PM Dr Manmohan Singh, an Oxford educated economist himself, asserted on the floor of the Parliament that the informal sector of the economy, comprising of micro and small enterprises, would be badly hit. Dr Singh’s forecast of two percent decline in GDP growth has not materialised. The latest economic data showed the Indian economy growing at a healthy 7.1 percent for the current fiscal despite note ban, with the agricultural sector doing especially well, helping India retain the tag of world’s fastest growing major economy.
Even those who say that this measure will do harm or cause distress in the short term but be in the interests of the country in the long run should be reminded of what John Keynes said once, “In the long run all of us are dead” former PM Dr Manmohan Singh on Demonetisation.
- Inherent strength of the rupee is demonstrated. When the now defunct high denominations of rupee 500 and 1000 were withdrawn, there had been many prophets of doom and gloom in the forex market and business circles passionately arguing that rupee would take a plunge vis-a-vis other internationally traded currencies such as the US dollar and the UK pound sterling. That the rupee continued to trade in a narrow range rather than free fall demonstrates the confidence of domestic and international financial players in the relative autonomy of Indian central bank -the Reserve Bank of India- in managing the currency market through an orderly supply of new notes as well as effective management through open market operations to curb speculation. This is reassuring and Indian rupee remains a well managed currency, the inherent value of which can be trusted.
A STEP IN THE RIGHT DIRECTION
November 8, 2016 has unquestionably been a red letter day in the political economic history of the country. To many public spirited persons and concerned citizens, it had become clear that for a country which prides itself as a moral force in the world, the level of deterioration in the moral fabric had been far too severe to be conveniently brushed under the carpet any longer . The crony capitalism, rent- seeking behaviour, hypocrisy and nepotism which have become entrenched in the politico- administrative culture, along with a yawning gap between the formally prescribed and actually practised societal behaviour, have weakened the social, economic and political foundations of the nation state that is India.
Certainly, the deep rooted corruption in public life has not spread overnight- it has occurred over decades, nay centuries. And now draining the swamp and adjusting to a new normal with new norms would be a long drawn process for all. Make no mistake- demonetisation on its own is insufficient to rebuilding an ethically oriented and more honest country. At best, it represents an ‘on -ramp’ to rebuilding a future that now requires each and every Indian to honestly look inwards and make a course correction to business as usual. It has been amply demonstrated that a large majority of Indians are ready to make sacrifices and are ready to make necessary changes in behaviour and actions provided the government is willing to actively walk the extra mile. Indeed, the hope that demonetisation has spawned has made the entire experience worth every rupee!
(Opinion desk, Uncolumn)