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What’s the Verdict on Demonetisation Data? Q&A With Raghav Bahl

Raghav Bahl was among the first to predict that most of the banned currency notes would wind up back in the system.

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(This story was first published on 2 September 2017. It has been republished from The Quint’s archives in light of the RBI’s Annual Report 2017-18, published on 29 August 2018, which noted that 99.3 percent of the demonetised notes are back with the central bank.)

Did demonetisation do us any good? The Reserve Bank of India’s Annual Report 2016-17 has detailed data that both the government and the opposition has interpreted to their benefit.

We now know that 99 percent of the banned Rs 500 and Rs 1,000 notes made their way back into the system. While Union Finance Minister Arun Jaitley said the government’s objectives of a less-cash, digitised and wider tax base have been achieved, the Congress continues to call it a disaster.

But what were the intended and unintended benefits of perhaps the most audacious economic scheme in recent political history? Here’s a Q&A with The Quint’s editor-in-chief, Raghav Bahl, who was among the first to predict that most of the banned currency notes would wind up back in the system.

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How did more than 90 percent of the scrapped notes end up back with the banks?

Forty-eight hours after demonetisation was announced, I wrote that almost the entire amount would come back. Now, I’m no astrologer, but what I was basing my judgement on was a very simple thing – human behaviour.

I think the architects of the demonetisation scheme looked too much at finance and economics and not at human behaviour or human psychology. If I had Rs 100 unaccounted for and someone came and said, “Well I’ll give you back 70 and figure out a way to take care of the 30”, who wouldn’t agree?

Raghav Bahl was among the first to predict that most of the banned currency notes would wind up back in the system.

The option of destroying wealth is something that no human being would accept. As they say, a drowning man will clutch at straws. So when you tell somebody that their wealth has become zero, it is the equivalent of telling the person that they’re drowning, and they will clutch at straws and find any solution. I think that’s what happened.

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Could demonetisation have been better implemented?

Now, I know all of us are much wiser after the event, but remember, I had written a lot earlier that there was a much simpler, far more effective way of doing this, with all the endpoints achieved and with much more revenue accruing to the government, rather than letting that kind of money get frittered away in corruption or going to corrupt bank managers or to people who were willing to convert your cash. A lot of the money went into those sleazy areas.

Frankly, all of that money could’ve come to the government if the scheme had been implemented as follows – the tenure of the scheme should’ve been very short, say, 15 days. You have to deposit your money or your money goes to zero.

Number 2, there should’ve been a one-time final conversion tax of 40 percent. So, if you give your money to the bank, 40 percent of the money would go to government coffers as taxes.

Raghav Bahl was among the first to predict that most of the banned currency notes would wind up back in the system.
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They would’ve said, “Fine, my wealth is almost gone, but I can give 40 percent to the government and convert 60 percent.”

In that way, all the money would still have come into the system, but instead of finding its way back through sleazy and corrupt routes, it would’ve come back through tax to the government. That would’ve been a win-win.

And the fact that you would’ve kept the scheme open for only 15 days would’ve meant that the poor people and the middle class would not have had to go through the pain that they had to suffer for six-seven weeks.

Of course, this is predicated on the premise that you would not make the mistake of having different-sized notes which were not compatible with ATM compartments. That you would’ve printed more Rs 500 notes than the Rs 2,000 notes. That before announcing demonetisation, you would’ve flooded smaller towns and villages, where digital cash is not used as much, with cash.

Had all of this been done, then exactly the same endpoint would’ve been achieved with much less pain, much more money flowing into governmental coffers and much less corruption. And I’m not saying this with the wisdom of hindsight. I had written about this within 10-15 days of demonetisation.

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How did demonetisation benefit the country?

I’m not saying the State did not do anything right. After nine months, you need to have a lot more nuanced understanding of what happened. Do remember it was an audacious move, both politically and economically. The world hadn’t seen anything like it. When you launch something as audacious as what was done, there is bound to be unintended consequences.

Raghav Bahl was among the first to predict that most of the banned currency notes would wind up back in the system.
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Raghav Bahl was among the first to predict that most of the banned currency notes would wind up back in the system.

The government has said that there is about Rs 1.8 lakh crore which is looking like suspicious money to them.

My point is we could’ve done that without the coercion. But the fact is, even with coercion, this trail of suspicious money is now available to the lawmakers, which I think is a positive.

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Raghav Bahl was among the first to predict that most of the banned currency notes would wind up back in the system.

Again, that is something that could’ve happened without coercion. That is something that is a concomitant of economic growth so you need not have used a sledgehammer to get that through. But despite the fact that you used a sledgehammer, I would count this as another benefit of demonetisation.

So, however flawed and difficult and audacious the move was and the pain it caused, there are certain intended and unintended benefits that have happened in the last nine months.

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Is the push to make India a cashless economy a misguided effort?

Now, there are two-three things here. Cashless economy is a concomitant, an outcome, of economic development. You should not push the cart before the horse. You should not say ‘I will go cashless and then I will economically develop’. Frankly, economic development will create a cashless economy by itself.

Raghav Bahl was among the first to predict that most of the banned currency notes would wind up back in the system.

But frankly, it’s an organic thing that happens when economies develop. And if we focus ourselves on a well-rounded economic growth path, then the move towards cashless economy will be a natural, organic one.

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How did demonetisation impact agriculture and other informal sectors?

Clearly, the most cruel impact was in the informal economy, which is the largest part of India’s economy. For the poor people, for farmers, it happened at the peak of the agriculture season. They were not allowed to exchange their cash at district co-operative banks, they were not allowed to use and pay for pesticides.

Raghav Bahl was among the first to predict that most of the banned currency notes would wind up back in the system.

But the fact is the sector has still not recovered because supply chains were completely disrupted. I think it is terribly important now for the government to use this disruption as a means of reforming agriculture mandis and your farm-to-fork supply lines.

It was an extremely cruel adverse move, but as with every adversity, there is an opportunity here.

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What has been the political impact of demonetisation?

It was thought to be politically devastating to the ruling party. But exactly the opposite happened. It became a strong political weapon in the armoury of the government. The sheer audacity of the move was supported by people, because they felt that here was a genuine attempt to break the status quo. They applauded it.

Indians are a very stoic people. We are a people who are told that you must suffer, you must do penance to cleanse yourself.

Raghav Bahl was among the first to predict that most of the banned currency notes would wind up back in the system.

So I think politically what could’ve been an extremely devastating move for the government actually turned out to be beneficial.

Video Editor: Purnendu Pritam

(At The Quint, we are answerable only to our audience. Play an active role in shaping our journalism by becoming a member. Because the truth is worth it.)

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