Demonetisation fails: GDP growth fell to 6.1% while Modi govt hunted for 'black money'

The Reserve Bank of India (RBI) in its annual report released the numbers behind the government's demonetisation exercise. The report revealed that 98.96 percent — or Rs 15.28 lakh crore out of the Rs 15.44 lakh crore — invalid currency notes had come back into the banking system by the end of June 2017.

The government of India banning high value currency notes on November 8 last year — a move that has come to be known as demonetisation — is truly a non-event, contrary to how the government had projected it.

Demonetisation caused India's Gross Domestic Product (GDP) growth to drop 1 percentage point (pp) to 6.1 percent in the January-March 2017 period, against the Central Statistics Office's estimate of 7.1 percent.

Nobel Laureate Amartya Sen might have had an inkling of that. After the note ban exercise, he had told India Today in an interview: "It is a gigantic mistake, both in terms of its objective of dealing with corruption as well as the objective of one rapid jump of getting into a cashless economy."

Even former vice-president and chief economist of the World Bank Kaushik Basu had said demonetisation's effect would be disastrous. "Demonetisation was poorly designed, with scant attention paid to the laws of the market, and it is likely to fail," he had said.

However, while briefing the press on demonetisation data, Finance Minister Arun Jaitley defended the move, saying the impact of the note cancellation move had been "extremely positive" in multiple areas. Accusing the Opposition of creating confusion that demonetisation was solely to curb black money, Jaitley clarified that the objective of the massive exercise hadn't been confiscation.

"The real objects of demonetisation were formalisation (of the economy), attack on black money, less-cash economy, bigger tax base, digitisation, a blow to terrorism," he told reporters on Wednesday. "We do believe that in each of these areas the effect of demonetisation has been extremely positive," he added.

The big question now is, where is the black money?

Going by data released by RBI, there can be two possibilities. One, black money that was held in the form of cash is almost negligible in the country. Or, the proportion of Rs 500 and Rs 1,000 currency notes in the form of black money has been successfully laundered back into the system, as Finance Minister Arun Jaitley suggested on Wednesday, when he said that not all the money deposited back in the banks could be "legitimate money".

The government objective to ban high value currency to hit black money could have been successful if a significant amount of cash had not come back into the system. Then the government could have argued that the unaudited cash is in the system now had no value due to demonetisation.

Speaking on demonetisation on November 14, Prime Minister Narendra Modi said: "I have asked the country for just 50 days. If after December 30 there are shortcomings in my work or there are mistakes or a bad intention found in my work, I will be prepared for the punishment that the country decides for me."

Watch his speech here: 

After RBI released the demonetisation data, former finance minister P Chidambaram lashed out at the government, saying 1 percent of demonetised notes not coming back to the central bank was a "shame on RBI".

He also posed a question before the Modi government in a tweet: "99% notes legally exchanged! Was demonetisation a scheme designed to convert black money into white? [sic]"

RBI being the central bank of India could have prevented the note ban exercise. But it did not, and in this process every citizens of the country — rich or poor, rural or urban — was affected.

The question that pops up here is, was it worth it? Given the number of jobs lost, the number of small businesses that vanished, the number of farmers who did not have cash to buy seeds in sowing season, was demonetisation worth it?

Politically, Modi is a winner as he successfully sold the idea that demonetisation was aimed to blow lid off the wealthy who hoard black money. With the cleaning-up campaign, the BJP stormed into the country's heartland and won the Uttar Pradesh Assembly polls hands down in February this year. But demonetisation is a policy failure, which forced common people and economy to suffer.