On November 8, 2016, when Prime Minister Narendra Modi announced to the nation that ₹500 and ₹1,000 currency notes would cease to be legal tender from midnight, he was unequivocal in asserting that the measure was aimed at breaking “the grip of corruption and black money”. Explaining how the shock move would work, he said: “The… notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper.” The premise then was that a sizeable part of the ₹15.44 lakh crore of the two high-value banknotes would remain in the hands of the holders and would not be tendered back into the banking system due to fear of punitive government action. There were hints that the windfall gains made from the scrapped currency notes that couldn’t be deposited in banks, estimated at anything between ₹3 lakh crore to ₹5 lakh crore, would be deployed for larger purposes — social welfare schemes and infrastructure projects, for example. This would be effected with the Reserve Bank of India, which bears the liability to honour the value of the country’s currency, paying as dividend to the government the majority, if not all, of its extinguished liabilities. But with the RBI’s annual report, released on August 30, showing that as much as 98.96% of the demonetised currency had returned to the central bank as of June 30, the gains in the form of cancelled liability from the note ban have been piffling.
For the Finance Minister to now claim that the “confiscation of money” had not been an objective, and for his Ministry to say that the government “had expected all the SBNs [specified bank notes] to come back to the banking system to become effectively usable currency,” is disingenuous. If that were indeed the case, the rationale behind the various stop-go announcements that followed in the wake of the November 8 decision are hard to fathom. For instance, the RBI circular setting a ₹5,000 limit on deposits of withdrawn notes unless done under the government’s amnesty scheme, tendered for the first time or explained otherwise was clearly a measure intended to dissuade bank customers from returning the demonetised currency. True, demonetisation has had some beneficial spin-offs such as arguably fostering greater compliance with the tax laws and reducing the economy’s reliance on cash through increased adoption of digital payments. But such gains could have been achieved by other and less self-defeating ways. As things stand, it is unclear how many of those who have laundered their black money will be punished. Despite the large amounts that were deposited in banks post-demonetisation, it is doubtful whether the Income Tax authorities have the necessary resources to track down and penalise the corrupt. All in all, the costs of demonetisation, which has resulted in robbing the country of its economic momentum, are far greater than the benefits it has bestowed.