Only a leader as popular and powerful as Prime Minister Narendra Modi could have brought in this much-needed transformative reform, without paying heed to political correctness.

New Delhi: On 8 November 2016 Prime Minister Narendra Modi launched a massive assault on the “shadow economy”, aka “black economy”, via demonetisation of old Rs 500 and Rs 1,000 notes, which was a one-of-its-kind move, for its sheer size, scale and timing, as 86% of the currency which was high value in denomination was retired and declared illegal tender. From 53% in 2004, to 28% in 2009 and then 13% in 2013 under a rudderless and incompetent Congress, the share of small denomination notes fell consistently, which was always a matter of grave concern. Demonetisation undid this unhealthy trend, and between April 2017 and December 2017, low value denomination currency notes rose to 48% of overall currency. As on November 2016, notes in circulation were Rs 17.74 lakh crore, which increased to Rs 21.22 lakh crore as on March 2019. Notes or currency in circulation (CIC), would have grown to Rs 24.55 lakh crore by the end of March 2019, higher by Rs 3 lakh crore than the current level, if the government had not demonetised currency notes.
Demonetisation, therefore, by reducing CIC, from 11.55% of GDP, to 10.48%, between November 2016 and November 2018, has been a resounding success and history will judge Prime Minister Narendra Modi, very graciously and flatteringly. Only a leader as popular and powerful as Modi could have brought in this much-needed transformative reform, without paying heed to political correctness.
Thanks to demonetisation, counterfeit notes reduced from 5.94 lakh in 2014-15,to 3.17 lakh in 2018-19, 2.97 lakh in 2019-2020 and are expected to fall to just 0.9 lakh notes, in 2020-21.Post demonetisation, Rs 13,000 crore was paid as self-assessment tax by targeted non-filers, who had a history of evading tax. Additionally, 3.04 lakh persons, immediately, post demonetisation, deposited over Rs 10 lakh each, in their respective bank accounts, of which 2.09 lakh persons paid Rs 6531 crore as self-assessment tax.
As on 30 September 2020, over 2450 Benami properties worth more than Rs 13,400 crore have been provisionally attached. Under the one time compliance window of three months that was given immediately given post Demonetisation, 644 declarants declared undisclosed assets of over Rs 4164 crore and paid 2476 crore as taxes and penalties. Also, as on 30 September 2020, 458 notices have been issued, for an amount worth over Rs 14,150 crore.
Even without the note ban, the Modi government unearthed more than a whopping Rs 1.81 lakh crore by way of unaccounted wealth in the last six years, of which more than Rs 66000 crore was money declared under the IDS (Income Disclosure Scheme), Rs 53,000 crore was the amount evaded via indirect taxes and Rs 62,000 crore was undisclosed income, including money laundered into some foreign banks that are now under under scrutiny of the Income Tax department.
Bhim Unified Payments Interface (UPI) has hit the 2.07 billion mark in volume terms in October 2020, up 80% versus October 2019.The transaction value also jumped 101% from Rs 1.92 lakh crore to Rs 3.86 lakh crore during the said period. Hence, for Modi’s critics to say that demonetisation was a futile exercise, is absolutely false. Again, the number of overall tax returns filed went up from roughly 4.04 crore in 2014, to over 6.79 crore in 2019, a robust rise of 68%.Net direct tax collections shot up smartly from Rs 6.96 lakh crore in 2014-15, to Rs 10.52 lakh crore, in 2019-20, a healthy rise of 51%. Greater formalisation of the economy is also evident from the fact that the number of persons covered under the ESI insurance scheme rose from 2.14 crore persons in 2015-16, to 3.41 crore persons in 2019-20, a solid jump of 59%.
Demonetisation also reduced the risk and liability of handling liquid currency. It is always easier handling soft money, as against hard currency. As every rupee or note is a liability for the government of India, this liability was reduced considerably, thanks to note recall. Post demonetisation, there was a secular decline in interest rates for housing loans, car loans and personal loans, benefitting the salaried middle class, tremendously. For example, the marginal cost of lending rate (MCLR), of SBI today, is between 6.65% and 7.3%, while prime lending rate (PLR), in 2013-14, before the Modi government took charge, was much higher, between 10.25%-11.50%. The average fall in home loan rates under the Modi dispensation has been over 200 basis points, from a range of 10.65-11% in 2013-14 to just about 8.35-8.7% in 2017-18. A large chunk of that fall happened, post demonetisation.
Again, going back in time, between November 2016 and March 2017, deposits with the banks went up by over Rs 3.5 lakh crore, aiding overall margins of banks. Deposits in Pradhan Mantri Jan Dhan Yojana accounts alone, rose to more than Rs 80000 crore in April 2018. Besides Jan Dhan accounts, what critics conveniently forget is that Rs 80,000 crore of money was repaid in cash for loans taken earlier, within few months of demonetisation, of which Rs 10700 crore worth of cash came into bank accounts in the north-eastern states, and another Rs 16000 crore came into regional rural banks (RRBs).
Also, the fact that more than 3 lakh shell companies had their bank accounts frozen, and their names struck off from the Registrar of Companies list, including blacklisting of more than 3 lakh bogus directors, is a glowing testimony to the clampdown on black money and illicit funding, that demonetisation dealt a body-blow to. An inept and incompetent Rahul Gandhi, the Congress scion and many others have claimed that Demonetisation was a failure because 99.3% of the notes that were declared illegal tender came back into the banking system. So, what if the 99.3% of the Rs 15.4 lakh crore that was Demonetised, came back to the banks? Not all of that 99.3% was white, or had been accounted for!
The biggest success of demonetisation, is the fact that anywhere between 2 lakh crore rupees and Rs 5.4 lakh crore of money that was earlier outside the ambit of the tax net and largely unaccounted for, came to be a part of the formal banking system. In other words, gross domestic product (GDP) between roughly 1% to 2.7% that was outside the formal banking channels, very much became a part of the formal taxation process. Also, while short-term benefits of “Note Recall” were sweeping and significant, equally, the tectonic long-term impact in bringing the informal economy into the formal fold, cannot be underestimated and will be visible in a more pronounced manner, in the coming years.
It is no coincidence that post “Note Recall”, low-cost Current Account and Savings Account deposits (CASA) with banks went up by almost 3-4%, thereby bringing down the overall cost of funds for banks and improving the cost to income ratio of many banks, particularly, those in the public sector. This in turn manifested itself in lower lending rates on home loans and personal loans, as mentioned above.
Also, property prices that were artificially kept elevated by nefarious builders, fell by 30%-40% post demonetisaton and rightfully so, given that 919 million square feet of unsold inventory existed in just the four metros of Delhi-NCR, Mumbai, Bangalore Hyderabad, in 2016-17.The more underrated and yet significant positive aspect of Demonetisation, however, was the perceptible shift from physical to financial savings, with assets touching a new high of Rs 20 lakh crore by July 2017, within barely 8 months of demonetisation. By November 2018, the Assets Under Management (AUM) touched a commendable Rs 24 lakh crore for the Indian mutual fund industry. Before demonetisation, the overall inflow via SIPs stood at Rs 43900 crore in 2016-17, translating into average monthly inflows of Rs 3658 crore, whereas post demonetisation, SIPs saw inflows of Rs 67,000 crore in 2017-18, translating into an average monthly inflow of Rs 5583 crore. Demonetisation transformed the investment landscape in India and mainstreamed small retail investors, through financialisation of physical savings. Yes indeed, demonetisation strengthened the “equity investment culture”, in tier-2 and tier-3 cities and towns. Also, the fact that more than 3.82 lakh shell companies had their bank accounts frozen, and their names struck off from the Registrar of Companies (RoC) list, including blacklisting of more than 3 lakh bogus directors, is a glowing testimony to the clampdown on black money and illicit funding that demonetisation dealt a body-blow to. Demonetisation’s positive results started showing by way of an increase in direct tax collections too. Two years prior to Demonetisation, direct tax collections increased 6.6% and 9% respectively. In the next two years, post demonetisation, the increase in direct tax revenues was over 14% and 25%, respectively.
Demonetisation has proven to be the cleanest and one of the most efficient and prudent ways of pump priming and formalising the economy, without the associated evil of adding to undue headline inflationary pressures, which is evident from the fact that retail inflation in financial year 2017-18 and 2018-19 stood at 3.6% and 3.4% respectively, from an average of 4.5% in 2016-17.By far, Demonetisation has been the most revolutionary and disruptive game-changer in India’s post-independent history—all thanks to the vision of one leader who chose to defy stereotypes. And that leader is none other than Prime Minister Narendra Modi, with a formidably clean reputation. “You will be shocked to know that many MPs asked me not to make PAN mandatory for gold purchase”—This forthright and hard-hitting quote by Prime Minister Modi, sums up the ethos of both his politics and economics. Modi is a leader who is politically astute but what separates him from his contemporaries is the fact that he realizes, eventually, good politics is all about good economics. And yes, demonetisation sought to do exactly that, by bringing in the much-needed attitudinal shift in the psyche of Indians, so that they appreciate that no matter what, some things never change—Honesty is still the best policy.
Sanju Verma is an Economist and National Spokesperson for BJP and bestselling author of “Truth & Dare—The Modi Dynamic”.