Why in news?
The RBI’s recent report on demonetisation clearly rubbished the hype created initially.
Could demonetisation curtail black money?
- Cash is only one component of black wealth - pitched at about 1%.
- Black money is a result of black income generation that is produced by various means.
- As these means are not affected by the one-shot squeezing out of cash, any black cash squeezed out by demonetisation would then quickly get regenerated.
- Hence, there is little impact of demonetisation on the black economy.
- The fact that 98.8% of demonetised currency has come back to the RBI only confirms this.
How has been the government’s reaction evolved?
- Changing Goalposts - The entire episode has understandably been highly embarrassing for the government since the initial days.
- To cover it up, it has kept changing its intended objectives.
- While the initial announcement suggested that the action was to weed out black money & counterfeiting and plug terror funding, it soon changed the narrative to going cashless.
- Anticipating an imminent failure midway, the government had also started saying that demonetisation is only one of the many steps to tackle the black economy.
- Furthering the Fallacy - The government now claims that inquiry is underway to trap suspicious massive deposits that had come into banks.
- Simultaneously, it also adds that “idle lying money” (read black money) has come into the system which will decrease the cash-to-GDP ratio and expand the tax base.
- The fact of the matter remains that none of these objectives have seen any significant progress.
What were its economic impacts?
- The severest bruns were been borne by the poor as the unorganised sector was completely shattered.
- At one stroke, we saw 1% point off the GDP growth rate being wiped out.
- With the note shortage slowly waning and the long-term economic and social effects are becoming evident.
Source: The Hindu
