Policy File: India’s economic experiment

The positives and pitfalls of demonetisation

Nicky Lovegrove

PHOTO: AP/Anupam Nath

Economics and finance, Government and governance | Asia, South Asia

8 November 2017

One year on from India’s controversial crackdown on black money, have the benefits been worth the economic disruption? Nicky Lovegrove takes a look.

In a surprise speech on 8 November 2016, Indian Prime Minister Narendra Modi announced the cancellation of high denomination bank-notes amounting to 86 per cent of the currency in circulation. The policy was intended to curb black money, terror financing and counterfeit currency, yet left millions of Indians in the lurch as they scrambled to dispose of their 500 and 1,000 rupee notes. One year on from this economic experiment, what has been the impact on the world’s largest democracy?

Responding shortly after the shock decision, the views of Policy Forum authors were mixed. Peter Sands wrote that Modi should be applauded for his boldness and that leaders elsewhere in Asia should follow his lead. Kaushik Bhattacharya and Sunny K Singh pointed out that large denominations are associated with crime and corruption, but criticised the suddenness of the decision.

Ramesh Thakur meanwhile saw the move as symptomatic of the low quality of India’s governance. In September he went further, arguing the policy “inflicted considerable pain and distress on the poorest labourers in the casual workforce, caused major inconvenience to millions and has little lasting gain to show for the shock to the economy.”

So what does the Modi government itself have say about the policy one year on? Writing in LiveMint, government minister Jayant Sinha calls it a ‘resounding success’.

“Demonetisation has provided Indian citizens a unique opportunity to re-imagine not only their currency, but also their own social mores, honesty, compliance with law, and their willingness to change and adapt to a more transparent and New India.”

Ahead of the anniversary, the Finance Ministry claimed the policy has indeed helped flush out black money from the economy, while also making a difference in the fight against terrorism and helping push India down the path of digitisation.

Meanwhile, opposition parties have launched street protests, labelling the November 8 anniversary of the black money crackdown a ‘Black Day’. Among their grievances are the upwards of 82 deaths which occurred as the result of financial stress from the policy, including several cases of elderly people dying in queues as they waited to exchange their defunct bank-notes.

What about the economic implications? With a series of 10 charts explaining the effects of demonetisation, Pramit Bhattacharya writes that the policy has clear costs, but uncertain benefits. In the Economic Times, Sanjaya Baru writes that in conjunction with India’s new goods and services tax, demonetisation will reduce the size of the informal economy, even though the jury is still out about whether this justifies the disruption caused to the country.

Similarly, Dinesh Unnikrishnan, writing on First Post, argues the policy has been no cure for India’s black money blues.

“There is no evidence to suggest that demonetisation has succeeded in achieving any of its three originally stated objectives – black money, corruption and terror funding, while it has made some progress in its later objective – moving the society to a cashless economy.”

And despite the short-term boost in digital transactions, it’s also too early to say how much demonetisation now will mean digitisation in the future, according to Praveen Chakravarty for the BBC.

What is clear is that despite the disruption and the uncertain benefits of the policy, Modi’s popularity doesn’t appear to have suffered as a result, with his party expected to win in upcoming state elections in Himachal Pradesh and Gujarat.

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