Demonetisation was introduced as a path breaking policy decision on 8 November 2016. What should have been announced by the RBI governor through a press release or a press meet was announced by the Prime Minister of India in a televised live address to the nation. Though Prime Minister Modi’s penchant for high drama is well known, a policy decision that resulted in 86% of Indian currency going out of circulation within a few hours from the announcement of the decision may well have warranted a direct message from the PM.
Since the announcement of demonetisation, the supporters of the decision were unanimous in their assumption that the government will receive a windfall gain from the decision, which it would be able to pass on the people of India. Other than big infrastructure investment, the windfall gain of the government was assumed to be used to spur demand and growth and to give tax breaks to genuine tax payers of the country. It was also believed that government will announce schemes to write off debts of farmers or will put Rs.15,000 in every Jan Dhan account. However Budget 2017 has put to rest all such assumptions of windfall gain for the government and subsequent benefits for the common man.
Even after two income disclosure schemes in this financial year, the net tax revenue of the government grew only by 17%, which is exactly the rate it grew by in the previous financial year 2015-16. The taxes on domestic petrol have increased by 152% from June 2014 to November 2016. The major share of increase in net tax collection could be accounted to this enormous increase. So it becomes clear that demonetisation had no significant influence in the growth of net tax revenue of the government.
In order to adhere to the fiscal deficit target of 3.2% of GDP, the total expenditure of the government is projected to fall from 13.4% of GDP in 2016-17 to 12.7% of GDP in 2017-18. If there was a windfall gain for the government after demonetisation, why should the government restrict itself in revenue expenditure?
Other than curbing and bringing back black money, demonetisation was also declared to be a step taken for containing terrorism and neutralising fake currencies. Even after 8 November, we are not seeing any reduction in the number of terrorist attacks. Reports state that fake currencies, even of the newly introduced 500 rupee and 2000 rupee notes, are available in the country now. The constant shifting of the demonetisation goal posts by the government has now resulted in a new target - cashless economy.
Initially, marketing demonetisation as war against black money had seen most citizens of the country blindly supporting the decision. The government was able to project those against demonetisation as worshippers of black money. But as demonetisation chaos spread to the streets, people started to understand what a stupid economic decision it was. We can see now that in the election campaign trail in UP, Punjab, Goa and Uttarakhand, no BJP leader is speaking about demonetisation. Any mention of demonetisation, the leaders believe, will put the common man against the party.
From the silence of RBI about the amount of money that has come back to the system after demonetisation, we can safely assume that almost all of 15.44 lakh crore of demonetised money has come back. So where is the windfall gain for the government? Are we to believe that all the difficulties we faced since demonetisation were the result of the stupidity of a group of men in the government? It is high time we hold the government responsible for such irrationality.
