Data from India’s Central Bank has revealed that the country’s unprecedented ban on high-value notes that was designed to detect “undeclared wealth” has flopped.
Financial experts and opposition politicians rounded on the Indian government on Thursday with sharpened criticism over the new data.
Nearly all of the banned currency in India during a much-hyped 2016 demonetisation drive was returned to India’s Central Bank, its annual report showed on Wednesday, outlining the futility of the exercise.
The move, the government had claimed, was aimed at making it difficult for hoarders of undeclared wealth, or “black money”, to exchange their undeclared cash for legal tender at banks.
Indians subsequently returned $216.7bn or 99.3 percent of the notes in circulation on November 8, 2016, when the cash ban was announced, the Central Bank’s annual report showed on Wednesday.
“Most of the stated objectives have been demolished. They were hoping that over 20 percent of the cash would not come back, a big hit on those who held black money. The Central Bank data shows that has failed,” Pronab Sen, former chief statistician of India, told Al Jazeera.
“The new data also shows that the push to move the Indian system away from cash to a cash-less economy has also been unsuccessful. The lesson is that you cannot wish away a cash-based economy. A cash-economy is not an illegal economy in any sense.”
The shock cancellation of the country’s 500 and 1,000-rupee notes, which represented 86 percent of the currency in circulation, had caused huge disruption.
But ministers of the Modi government insist that “the honest have been honoured and the dishonest have been troubled”.
In a speech on the eve of the cash ban, Modi said he was banning the higher value notes to cripple the country’s widespread corruption and counterfeit currency problem.
Immediately after announcing the directive, the prime minister was cited by local media as saying “if you find anything wrong in my intentions or action, hang me in public”.
On Wednesday, opposition politician and Chief Minister of Delhi Arvind Kejriwal tweeted to ask “people have a right to know – what was achieved through demonetisation?”
People suffered immensely due to demonetization. Many died. Business suffered. People have a rt to know – what was achieved thro demonetization? Govt shud come out wid a white paper on the same. https://t.co/q61fil4KgX
— Arvind Kejriwal (@ArvindKejriwal) August 29, 2018
The shock cash squeeze, touted by the Modi government as a “game changer”, had resulted in a sharp slowdown of the economy. Economic growth hit a three-year low in the third quarter of 2017.
With new data showing almost all of the abolished currency had made it back into the banking system, critics are questioning the need and the costs, both economic and human, of the exercise.
Citizens, rendered cash-less overnight, were forming serpentine queues at banks and ATMs for weeks as many ran out of cash to buy food, plant crops or bury the dead.
Indian media reports said scores of people died owing to distressing consequences of the drive, some of them in banking queues.
Former-minister Sen, an economist, argued the cash ban of 2016 has also dealt a body-blow to India’s informal sector.
“The informal sector’s capital needs are met by moneylenders and the informal credit market. Demonetisation seriously penalised this category which is dependent on cash transactions. So, now, the finance available for the informal economy has been hit. Part of India’s crippling rural distress is because of this,” Sen said.
Surinder Sindhu, a farmer in Rohtak in the northern Indian state of Haryana, recalled the panic and the chaos following the cash ban that winter.
“I was happy initially as I thought this would trouble all the corrupt people. But then, it became a nightmare as we had no cash to buy seeds for sowing crops and my daughter’s wedding was weeks away. There was no money in the banks, poor people suffered the most,” he told Al Jazeera.
But the audacious plan still has its backers.
According to Amit Malviya, in charge of the ruling Bharatiya Janata Party’s Information and Technology cell, “money in the bank means liquidity” and “formalisation and digitisation of the economy”.
I see a lot of ill-informed views on RBI’s report on demonetisation. Quick fact check:
1) money in the bank means liquidity
2) leading to lower interest rates
2) tax evaders in net
3) formalisation and digitisation of economy
4) tax compliance up
5) honest tax payers honoured pic.twitter.com/cefYJXa9xQ
— Amit Malviya (@amitmalviya) August 30, 2018
But Wednesday’s new data revealing a key anti-corruption drive as unsuccessful could add to anger among voters in advance of the 2019 general election.
A recent opinion poll by an Indian media company this month showed Modi’s popularity rating dipped below 50 percent for the first time.
“The reason Indians were not angrier about the failure of the note ban is because Prime Minister Modi personally had enormous political capital and goodwill in his stated fight against corruption,” Sen said.
“The people trusted him. But the anger is starting to show now with rural distress and lack of jobs,” he warned.