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.
