Demonetisation: Modi’s Gamechanger

Prime Minister Narendra Modi on November 8, 2016, launched a massive assault on the ‘shadow economy’, aka ‘black economy’, via Demonetisation of old Rs 500 and Rs 1,000 notes, which was one of its kind moves, for its sheer size, scale and timing, as 86 per cent of the currency which was high value in the denomination was retired and declared illegal tender. From 53 per cent in 2004 to 28 per cent in 2009 and then 13 per cent 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 per cent of the overall currency. This, in itself, is an ample justification for supporting Demonetisation, both in theory and practice.

“Demonetisation was a major step to fight black money and corruption; People had asked me to fight graft”, Another powerful quote by PM, Modi.

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 in circulation 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.

The Demonetisation move has been a landmark one in the last seven years, towards building a cleaner and more transparent India. Counterfeit notes and black money hoarding, are activities that promote currency frauds and terror financing. 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. One of the most significant advantages of demonetisation was to put a complete full stop to malpractices carried out in the parallel money markets. Post Demonetisation, Rs 13000 crore was paid as self-assessment tax by targetted 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 September 30, 2020, over 2450 Benami properties worth more than Rs 13400 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 30th September 2020,458 notices have been issued, for an amount worth over Rs 14150 crore. Currency in circulation (CIC) rose from Rs 17.74 lakh crore in November 2016, to Rs 22.35 lakh crore, in December 2019. CIC grew by an annual 14.51 per centbetween October 2014-October 2016, but post-Demonetisation, CIC growth was lower, as the economy moved from cash-based one to a “less-cash” one. The banking system too have improved considerably, with the economy moving towards a “less-cash” and a “more plastic money”, scenario. Moving towards a less-cash economy which reflects higher digitisation, also implies better access to credit and, revamped financial operations.

Demonetisation, therefore, by reducing Currency in Circulation, from 11.55 per cent of GDP to 10.48 per cent, 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 famous and influential as Modi could have brought in this much needed disruptive reform. A lesser leader would have never dared to do what Prime Minister Modi did. For Modi, it is not political correctness but “India First”, that has always been his guiding diktat and rightfully so.

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-year, of which more than Rs 66000 crore was money declared under the IDS (Income Disclosure Scheme), Rs 53000 crore was the amount evaded via indirect taxes and Rs 62000 crore was undisclosed income, including money laundered into some foreign banks that are now under the scrutiny of the Income Tax department. Flushing out undisclosed foreign assets and bringing them into the formal tax net, is being done on a war footing.

Bhim Unified Payments Interface (UPI) has crossed the 2-billion transaction mark in October 2020. According to NPCI, the UPI volume has grown 80% from 1.14 billion transactions in October 2019 to 2.07 billion transactions in October 2020. The transaction value has also jumped 101% Rs 1.92 lakh crore to Rs 3.86 lakh crore during the said period. BHIM UPI has managed to change the face of “person-to-person” and “person-to-merchant” money transfers in the past few years while making them safer and more secure.

Hence, for Modi’s critics to say that Demonetisation was a futile exercise, is false. For instance, Corporate tax filers rose by a solid 35% between 2013-14 and 2018-19, moving up from 7.15 lakh filers, to 9.65 lakh filers. Between 2016-17 and 2017-18 alone, this number jumped from 8.04 lakh filers to 9.43 lakh filers, a rise of 17%. The number of new tax filers also went up dramatically from 66.62 lakh in 2015, to 86.16 lakh in 2016,107.76 lakh in 2017 and 110.25 lakh, in 2018. Equally, the number of overall tax returns filed went up from roughly 4.04 crore in 2014, to over 6.79 crores 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%. The 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.

More and more people have been using online portals to make their purchases. The new legalised money in the last seven years was thus, utilised by banks and financial institutions to grant loans to needy borrowers. The financial or the banking system also received an additional liquidity boost in terms of anywhere between Rs 7-8 lakh crore of base money and helped in bank recapitalisation. Demonetisation also reduced the risk and liability of handling liquid currency. It is always more comfortable handling soft money, as against hard cash. As every rupee or note is a liability for the government of India, this liability was reduced considerably, thanks to Demonetisation.

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%. MCLR by key banks were slashed by almost 50-100 basis points, within less than a year from the date Demonetisation was effected, from 9.15% to about 8%, in many cases.

Disposable incomes rose and so did consumption spending, with Gross Domestic Product (GDP) in 2016-17 coming in at 8.2%, the highest ever in more than a decade, driven partially, by lower lending rates. The average fall in home loan rates under the Modi dispensation has been well 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.Current MCLR rate of SBI is at record lows and ranges from 6.65% to 7.30%, varying by reset frequency of the loan.

Without doubt, the secular decline in lending rates has happened amongst other things, due to one of the most pathbreaking reforms of our times, namely, 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 80000 crore of money was repaid in cash for loans taken earlier, within few months of Demonetisation, of which Rs 10700 crore worth of money came into bank accounts in the north-eastern states, and another Rs 16000 crore came into regional rural banks (RRBs).

A big beneficiary of the entire note-ban exercise was the average middle class and salaried Indian, given that lending rates (MCLR) by key banks were slashed by almost 50-100 basis points, within less than a year from the date demonetisation was effected, from 9.15% to about 8%, in many cases. This led to a fall in home loan rates. As a rule of thumb, funds-based lending rate (MCLR) for most banks came down from 9.15% to eight per cent.

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. Modi naysayers, including an inept and incompetent Rahul Gandhi, also claim 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!

 

Also, a large part of the money that came back to the banks was unaccounted for; this is evident from the fact that almost 18 lakh bank accounts went under the scanner of the Enforcement Directorate (ED), as money deposited in these accounts was not in sync with the tax profiles concerned. Hence, critics of Demonetisation seem to have completely missed the plot here; for instance, individuals and entities who deposited more than two lakh crore rupees in cash during Demonetisation had never filed income tax returns. Of a total of 22.22 lakh tax evaders, 21.12 lakh were individuals, 11579 were companies and the rest, comprised firms (57693), trusts, Associates of Person (AoP), Hindu Undivided Family (HUF) and Artificial Judicial Persons (AJPs).

The most significant 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 traditional banking channels, very much became a part of the legal taxation process. Also, while short-term benefits of “Note Recall” were sweeping and significant, equally, the long-term tectonic impact in bringing the informal economy into the formal fold, can not be underestimated and will be visible in a more pronounced manner, in the coming years.

Assuming the informal economy at roughly 20% of GDP and assuming the formal sector is taxed at an average rate ranging between 15% and 20%, with Demonetisation, once the informal and formal gradually merge, the boost to GDP on this count alone, going forward, will be huge. That is precisely what happened between 2016 and 2018. Greater formalisation led to more jobs and more consumption-driven growth, as is evident from EPFO subscriber numbers, in the subsequent years, following Demonetisation.

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 price 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-Demonetisation 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 eight months of Demonetisation. For example, 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. In contrast, post-Demonetisation, SIPs saw inflows of Rs 67000 crore in 2017-18, translating into an average monthly inflow of Rs 5583 crore.

Again, between April 2018 and October 2018 alone, Indian mutual funds saw Rs 52472 crore worth of record SIP related inflows.

Interestingly, over 1.6 crore new investor folios in 2017-18, 67 lakh folios in 2016-17 and 59 lakh folios that were added in 2015-16 to the mutual fund industry, mainly from tier-II towns, speak volumes about how the financialisation of physical savings post-Demonetisation, has transformed the investment landscape in India and mainstreamed small retail investors.

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. Demonetisation’s positive results started showing by way of an increase in direct tax collections too.

In the next two years, post-Demonetisation, the increase in direct tax revenues was over 14%. Similarly, in the year 2017-18, the tax returns filed saw a rise of a solid 25% over the previous year. To cut to the chase, from 3.8 crore tax filers under the erstwhile, corrupt, Congress-led United Progressive Alliance (UPA-2) regime in 2013-14, to 6.86 crore tax filers in 2017-18, under the impeccably clean, Narendra Modi-led BJP dispensation, a resounding 80.53% jump in the tax base, is arguably one of the biggest successes of Demonetisation, which made it unfashionable to hide wads of notes in pillowcases, dingy lofts and under innocuous-looking mattresses. While the number of overall tax filers burgeoned to 6.86 crores, the number of individual tax filers between 2014 and 2018 also went up by a solid 64%, from 3.31 crore to 5.44 crore, during this period.

Demonetisation also had a tremendous impact on the digital economy, as has been explained in one of the paragraphs, above. Transactions at point-of-sale (PoS) terminals at merchant locations surged to 328 million from less than 109 million by way of volume, between November 2016 and May 2017in barely 6 months. Again, Demonetisation led to a massive scale-up in digital infrastructure, with one million additional PoS terminals being added within just three months of “Note Recall”, thereby taking their total number to more than 2.52 million. Also, prepaid payment instructions (PPIs), including mobile wallets, registered a whopping 375% jump at 342 million in March 2017, from 72 million, pre-Demonetisation.

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 the 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, to tread a path that none would have dared to. And that leader is none other than Prime Minister Narendra Modi, with a formidably clean reputation; he is the leader,who, with his bold, “Note Recall” move, carved out a corruption-free “New Normal” for India’s 1.38 billion strong population, so that we leave a better tomorrow for posterity.

“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 politically astute leader, but what separates him from his contemporaries is the fact that he realises. Eventually, good politics is all about sound economics. And yes, Demonetisation sought to do precisely 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.