A year later, impact of demonetisation is still being seen through a political prism
When Narendra Modi made his momentous decision last year to withdraw all high-value currency notes from circulation it threw the country into days of turmoil. India was, after all, a nation where cash was the grease that kept the Indian economic machine rolling. Admittedly, a lot of money in India was unaccounted for, stashed away in gunny bags in basements. At the same time, India has notoriously high levels of tax evasion; in fact, of all the large economies in the world, India had the lowest rates of tax compliance. Modi, and make no mistake, this was a decision that he himself took, must have genuinely felt that the shock to the system his decision would administer was desperately needed to secure India’s future. A year later, it is worthwhile to ask: Was it worth itIJ First things first, the decision did end up becoming a political masterstroke. By successfully positioning the move as something that impacted the wealthy and those who did not have India’s best interests in mind, the Bharatiya Janata Party gained. As strange as it might seem, despite the queues of people outside banks waiting to change notes and bank officials working overtime, demonetisation played a huge role in the BJP’s stunning win in Uttar Pradesh. People clearly felt that the move impacted the guy above him and this cemented Modi’s image as a reformer and someone who cares for the poor. It may have befuddled economists and impacted India’s chattering classes, particularly on social media, and led to hundreds of angry, half-witted columns, but the poor saw it as considerable reform and rewarded him politically.
The chattering classes stuck in their urban prisons ignore India’s massive wealth disparities at their peril. But there is also no doubt that India’s economic fate is not determined by the ‘long tail’ as economists like to call it, but biased towards the 15-20 million households on the extreme left of the economic spectrum. There is no doubt that unaccounted cash, or ‘black money’, had become normalised in India as had tax avoidance. Modi realised that for the Government to mop of the extra tax revenues from this horde of cash it would need to do something drastic, and demonetisation was precisely that. Of course, it is apparent that there was a huge amount of corruption by those who had cash that needed to be changed. But, it appears that with data-crunching now possible through massive banks of computers, an effort is on to figure out outliers in the data. Demonetisation did have a massive impact on the economy, particularly in consumer spending, where cash ruled earlier. The problem might have been mitigated within a few months, but India’s economy had to also cope with another massive reform, the introduction of the Goods and Services Tax, which again was imposed primarily to make India’s economy more formal. On the whole, while GST is a major tax reform, the layers of bureaucracy it has added were unnecessary and have created headaches. But while both demonetisation and GST will allow the Government to mop up thousands of crores from tax-cheats, it would have been better if the Government released more data to the public regularly. And for those who complainedIJ It would be a smart move for this Government to now reduce income tax a bit in the upcoming Budget.