To Judge Demonetisation On Basis Of A Single Parameter Is Incorrect: S Gurumurthy

Soon after the Reserve Bank of India released its annual report, which said that around 99 per cent of the junked 500 and 1,000 rupee notes had returned to the banking system, the government came under attack from the opposition and its critics that the move had failed to bring about the desired result – assumed to be the elimination of black money from the system. The opposition was quick to pounce on the government, with former finance minister P Chidambaram wondering if demonetisation was “designed to convert black money into white".

Most critics of the idea believed – or gave the impression they do – that demonetisation was a single-objective project. Having not achieved its objective, the move had ended in a failure, the critics claimed.

Swaminathan Gurumurthy, a well-known economic and political commentator, does not agree. In his column in the New Indian Express, he has written that Prime Minister Narendra Modi’s demonetisation drive – a multi-dimensional project – has been a huge success and has slammed journalists and economists, who he says ceased to be objective in looking at the project’s multi-dimensional impact on India’s economy.

Gurumurthy writes that what led to demonetisation was the unprecedented rise in the circulation of high-value notes from Rs 1.5 lakh crore in 2004 to almost Rs 15.5 lakh crore when the drive was announced by Prime Minister Modi on 8 November 2016. With the increase in share of high value notes in the total currency in circulation from 34 per cent to over 88 per cent came steep rise in gold, stock and land prices, which rose almost 10 times in the six years from 2004 to 2010 as compared the previous five years, 1999-2004.

“It did not need a seer to say that the hyper GDP growth (8.6 per cent) in the latter six years (2004 to 2010) was just wealth-led growth – a mirage that yielded neither jobs nor gave external or internal comfort to the economy. The reason for this spurious growth clearly was the high asset prices, which were fueled only by an unprecedented rise in high-denomination notes,” Gurumurthy mentions in his column, adding that the one of the aim of the demonetisation drive was to puncture this massive buildup of high-denomination cash stock.

Taking on the assumption that the sole aim of the demonetisation drive was to eliminate black money from the system, he pens down a non-exhaustive list of multiple objectives inherent in the demonetisation project. The objective, he writes, included, “(1) to catch black money; (2) to prevent its growth; (3) to expand the taxpayer base; (4) to arrest and deflate cash-stoked asset prices; (5) to bring down the burgeoning cash stock, particularly the high-denomination notes that had become the villain; (6) to suck up the excess cash with the public that was building a parallel economy to the banking system; (7) to enable the banks to multiply the additional deposits by fractional reserve model as lendable resources; (8) to bring down the interest rates; (9) to increase the share of financial savings in household savings; (10) to crash the unaffordable land prices to make housing affordable; (11) to organise the unorganised sector and provide organised support to it; (12) to shift from a jobless high growth to growth with jobs – namely growth of a real economy; and (13) eliminate fake currency and starve Kashmir terrorists and naxalites of funds”.

None of these goals could have been attained except by sucking away the huge cash build-up through a high-value note ban, he writes, adding that it is irrational to equate the success of the anti-black money agenda of the project with only the quantum of de-legalised notes that did not return to the banking system.

The utterly political debate around demonetisation forced Prime Minister Modi to use singularly popular logic to defend demonetisation – namely to detect and eliminate black money. The result of this move, Gurumurthy points out, was that the opposition successfully reduced the definition of failure or success of the drive to the sole test of how much black cash would or would not return to the banks.

Gurumurthy emphasises on the point that merely depositing money in banks will not change it to ‘white’ and tax liability will remain. The Income Tax Department, as the government has noted on multiple occasions, is in the process of scrutinising deposits made following the announcement of demonetisation. Around Rs 2.9 lakh crore deposits are believed to be under investigation by authorities.

Explaining further, he notes that black money detection under demonetisation falls into three categories: (1) undisclosed income in de-legalised notes admitted Rs 29,000 cr; (2) old notes not deposited Rs 16,000 crore; and (3) most importantly, deposits of Rs 2.90 lakh crore under tax probe.

“The last component, which is huge, is being completely disregarded to conclude, totally unfairly, that the black money agenda of de-mon has bombed. The actual discovery of Rs 45,000 crore of black money and the potential discovery of Rs 2.9 lakh crore under probe – uncovering a total of Rs 3.35 lakh crore as actual and potential black money – has been achieved only because of de-mon,” he writes.

According to Gurumurthy, tax authorities will detect some Rs 1.5 lakh crore of black money even if half the potential black cash deposit is eventually taxed.