On the second anniversary of demonetization [on November 8, 2016, the prime minister, Modi had declared the old 1000/500 rupee notes invalid], the opposition parties led by grand old Congress continue to demonize this far reaching policy reform alleging that it has led to precipitous decline in economic growth, caused unprecedented miseries to the poor even as the rich continue to add to their wealth and have even got away scot free converting their black money/unaccounted cash into white.
There was some short-term disruptive effective [Modi himself had anticipated at the time of announcement and even requested the citizens to bear this pain for the sake of long-term gains] which was manifest in decline in GDP [gross domestic product] during two quarters ending March 31, 2017 and June 30, 2017 – following the quarter in which this decision was implemented. Thereafter, it bounced back to high growth trajectory.
During the last quarter of 2017-18 and first Qr of current year, GDP growth was 7.7% and 8.2% respectively. For five years in row since 2014-15 [when Modi took over the reins], India has been the fastest growing economy in the world despite facing a not so favorable external environment. These achievements are recognized world over including global institutions such as International Monetary Fund [IMF] and World Bank.
A high GDP growth does not come in isolation. It is the outcome of pick up in economic activity in various spheres viz. agriculture, industries, services including small and micro enterprises [SMEs] which are mostly in the informal sector. This could not have happened without deployment of workers on a large scale. Therefore, for the critics to allege that demonetization has caused massive job loss is untenable.
Viewed from all critical angles viz. job creation, income generation, and distribution of wealth etc, the note-ban was a pro-poor step. To gauge this, all that one needs to do is to look at the resounding victory of BJP in the Uttar Pradesh [UP] assembly elections which were held within a few months of the announcement of demonetization.
In a state, where the electoral outcome is hugely influenced by cast and religious considerations, a single party [read: BJP] securing over 3/4th majority can only be explicable in terms of an overarching force that finds resonance among majority of the poor transcending all such barriers. The demonetization was one such force that made a tremendous impact. This is how things panned out.
Faced with a disastrous scenario of their black cash turning into junk, the hoarders were keen to deposit the same in the banks within the permitted 52 days window [till December 30, 2016]. However, considering that deposit in excess of Rs 200,000/- would have come under the scanner of Income Tax [IT] department, many of them split the cash into several lots of less or equal to the threshold to be deposited by as many persons.
Let us assume, a businessman had unaccounted cash of Rs 1 crore. He split this into 50 lots of Rs 200,000/- each and then, went about looking for 50 candidates/persons to carry the money to deposit in their respective accounts. The obvious choices were peon, sweeper, courier boy, maid, servant, contract worker etc, in other words all those belonging to the poor class.
Naturally, they would do this for a price; even if it was say, 1/4th each would end up raking in Rs 50,000/-. If, he kept the entire amount i.e. Rs 200,000/- with him, there was little that the businessman could do to take it back [he could not have lodged a complaint with the authorities either, due to the fear of being questioned by agencies on the source of cash]. There could not be a better way of redistributing wealth.
On August 28, 2014, the prime minister had launched PM Jan Dhan Yojna under which a poor household could open a zero balance account. Currently, there are over 300 million Jan Dhan [JD] accounts with deposits of about Rs 80,000 crore. Post-demonetization, there was a massive surge in deposits in JD accounts which clearly points towards these being used for parking black money.
During the 52 days window, a person was allowed to exchange Rs 4000/- worth of old [albeit banned] currency for new notes. If, a contract worker/small vendor [who critics claim were thrown out of work due to sudden demonetization] made two trips to the bank in a day to exchange black cash and got 25% commission from the hoarder, he would rake in Rs 2000/-.
Despite looking unemployed [courtesy, sucking out of 86% of the currency in the system affecting cash-driven businesses], in reality, the poor – both working and non-working – were having a good income source and many of them added to their savings in the bank accounts. Above all, they had a psychological satisfaction that the black money amassed by the dishonest/corrupt persons was coming out in the open.
Apart from the immediate gains, they were also overwhelmed by the promise Modi made: that all of the money collected from the hoarders will be used for development and adequately funding the welfare schemes for the benefit of the poor – implying gain in the long-term as well. Clearly, this was party time for them.
In short, irrespective of what the critics might say, majority of the poor in UP actually experienced these gains – both tangible and intangible – leading to their resounding vote for BJP/Modi in elections. The impact permeated in other nearly half a dozen states where elections were held post-demonetization.
As for the money deposited by hoarders in their own account, contrary to what critics say, this has not become white. There are about 1.8 million accounts in which ‘suspicious’ deposit of over Rs 300,000 crore were made. These are on the radar of IT who will collect tax plus penalty and even prosecute in some cases.
To sum up, demonetization is a major reform that has smashed the unaccounted wealth amassed by a few and along with other measures such as GST [Goods and Services Tax] set the economy on a course that rewards honesty and penalizes dishonesty. This has also enormously benefited the poor. .