First, if Raghuram Rajan did not approve the demonetization “at any time during his term,” how did the government claim the Indian Reserve Bank (RBI) on board six months before launch to begin preparations for the massive disruption exercise in the economy? Rajan left the RBI on September 4, 2016 and the demonization was announced two months later, on November 8, 2016.
Second, if the RBI, under Rajan, had warned the government that the short-term costs of the measure could outweigh the long-term benefits, especially if not performed well, other ways to achieve this goal, then why the government pursues the plan ignoring the advice of the monetary authority and the custodian of the currency in an economy where growth has not yet been consolidated?
In hindsight, we all know that the government and the RBI unfortunately have not planned it properly. The immediate context of these two questions is the revelations of Rajan in his new book, I Do What I Do: On the Rhetoric of Reforms and Resolve and through their interviews in the media in this context. In an interview with the Times of India, Rajan said that although RBI was consulted, at no point in his term was a request for a decision on demonetization (see interview here).
The answers to these questions are even more critical after 10 months of demonetization, where 86% of the currency was canceled in a few hours by a television advertisement of Prime Minister Narendra Modi. According to RBI’s recent annual report, about 99 percent of the demonetized notes returned to the banking system. It is Rs 15.28 trillion Rs 15.44 lakh crore of the demonetized total currency.
Only a little over Rs 16,000 crore Rs 15.44 lakh crore did not return. However, this is not the final theme. The RBI should also count the old notes received by the cooperative banks and those deposited by the citizens and institutions of Nepal. Once completed this exercise, the final score will not be far from 100%.
The monetary cost of printing the new currency for the RBI rose to Rs 7,965 crore, more than double compared to Rs 3,421 crore the previous year. The number of fake notes or fake notes detected during the exercise is only tiny, approximately 7.6 lakh pieces. The cost of printing the new currency and the interest paid on reverse recovery operations to absorb excess liquidity in the banking system after demonetization has contributed to a sharp decline in RBI profits and its transfer of dividends to the government , which fell in half to Rs 30,659 crore of Rs 65,876 crore last year and against an expected target of R 74 741.
In general, the tangible costs of demonetization have far exceeded the achievements to date. The government originally planned Rs 3 lakh crore in Rs 4 lakh currency crore would not return to the system and this will be an exceptional gain. But that did not happen. The economy paid a great price for this year, with GDP growth of 6.1% in the March quarter and 5.7% in the June quarter. There are reports of large job losses in the informal sector. Even right-wing unions have accused the Modi government of destroying jobs with the ill-prepared movement.
There are conflicting claims and claims with respect to the stated 10 month profile removal purposes. Initially, there were three main objectives before the government began to change the goal posts after each step. They fought against black money, bribery and the financing of terrorism. Later, the objectives of the digital economy and the economy without money were added when Modi spoke of them in his program Mann ki Baat. Later, it became much emphasis on the integration of money and the expansion of the tax base as the major victories of demonetization.
There is no solid evidence that demonetization achieves any of these goals against government demands. There was a peak in digital transactions after the demonetization when money was not available in the system and now has returned to the “line of trend growth”, the data suggest that the tax base may have increased because of the ban of the rating and how much this will actually contribute to the increase in tax revenue is questionable.