It has been over a year that Indian Prime Minister Narendra Modi introduced a ban on large notes in the country, in an apparent bid to crack down on black money, corruption, terrorism and fake notes.
Indian news outlet NDTV said in an analysis that the short term costs of this move had outweighed its benefits.
According to the report, Modi’s move has invalidated 86% of currency in circulation in the Indian economy.
Economic outlook has dimmed substantially for Asia’s third-largest economy following the cash shock. The biggest blow for Modi, who faces re-election in early 2019, is that growth has slowed to levels last seen during his predecessor’s administration.
India’s previous government was criticised for massive corruption scandals and a policy paralysis, helping Modi sweep to power in 2014 with the biggest mandate in three decades.
“The process of curbing black money and corruption does not begin or end with demonetisation,” Sonal Varma, chief India economist at Nomura Holdings Inc in Singapore, told NDTV.
“Black money is held not just in cash but also real estate and gold.”
Prime Minister Modi later widened his objectives to include digitisation and boosting the number of tax payers.
PM Modi had said the ban on 500- and 1,000-rupee notes was needed as these high-value bills helped “enemies from across the border run their operations”.
While the detection of counterfeit currency increased in the 12 months through June 30, it was still just 0.08% of total currency in circulation compared with 0.07% the previous year.
More importantly, the Reserve Bank of India hasn’t been able to protect its new notes from counterfeiters, as fake versions of the 2,000-rupee note announced November 8, 2016, have been detected.
Instances of stone pelting in the border areas of Jammu and Kashmir fell drastically after the cash ban but started rising again.
While the period immediately after demonetisation showed a dip in fatalities in insurgent violence, a direct link isn’t clear.
Soon after the cash ban, the government’s counsel told the Supreme Court that about a third of the Rs15.44 lakh crore of bills invalidated wouldn’t be deposited into banks, implying that Indians would rather forfeit this money rather than risk detection. However, 99% of the notes have been returned.
“As almost all cash withdrawn has been translated into a rise in bank deposits, one can question to what extent demonetisation has really been effective in wiping out black money,” Arjen van Dijkhuizen, senior economist with ABN Amro Bank NV in Amsterdam, said by email.
Widening the tax base is probably where analysts are most optimistic about demonetisation.
The government has said it will scrutinise the deposits that have flowed into banks since the cash ban to detect any tax evaders.
Success in widening the tax base would ease pressure on public finances in a nation where less than 5% file tax returns.
“The exercise changed the public’s perception of what the government can, and will do to root out corruption,” said Shailesh Kumar, senior analyst for Asia at Eurasia Group.
“In some ways PM Modi was rewarded for it, as he was seen taking on the issue of corruption which many believe is one of India’s biggest problems.”
The gamble seemed to have paid off in the electorally important state of Uttar Pradesh, where Modi’s Bharatiya Janata Party swept elections in March. However, growth has since slowed and there are rumblings of dissatisfaction going into elections in Modi’s home state of Gujarat next month.
A vanguard of digital payment providers have benefited from PM Modi’s move.
The biggest player is Paytm, backed by China’s Alibaba Group Holding Ltd, which has seen its customer base surge since November.
Demonetisation also triggered record domestic inflows into mutual funds, which have gushed into the equity market and pushed the key indexes to multiple records.
While overall digital transactions have dipped as cash returns to the economy, the government points to relatively lower levels of currency in circulation as a win.
If it was not for demonetisation, India would have had some Rs18 lakh crore in high-value bills today, instead it has Rs12.5 lakh crore, Economic Affairs Secretary Subhash Garg estimates.