Demonetisation, 3 years on: A look at impact on key sectors of the economy

With three years of data available to back or reject the various assertions and assumptions, Business Standard looks at the Modi govt's most disruptive economic measure, the 'note ban'.

On November 8, 2016, Prime Minister Narendra Modi announced to the nation that Rs 500 and Rs 1,000 currency notes — 86 per cent of all currency notes in circulation in value — would cease to be legal tender. The stated objectives were unearthing black money, cracking down on counterfeit currency, and choking terror financing.

Unsurprisingly, there were strong reactions both in favour of and against the unprecedented move, which would come to be known as ‘demonetisation’ or ‘note ban’. While some hailed it as a courageous step against impropriety that was hurting the economy, others saw the move itself as disastrous for the economy.

In the months that followed, even as reports suggested that the government had not come any close to achieving its stated objectives, the government was seen patting itself on the back for the country’s move towards becoming a ‘cashless’ economy, or, as the PM said, a ‘less-cash’ economy. Many called this an act of ‘moving goal posts’ and rushed to label demonetisation as an economic nightmare.

Three years later, we have enough data to analyse and gauge the impact of the note-ban exercise on various important sectors of the economy.

Jobs

According to Labour Bureau's Sixth Annual Employment-Unemployment Survey, the unemployment rate rose to a four-year high in 2016-17, when the government demonetised old currency notes. In 2017-18, the country's unemployment rate stood at a 45-year-high of 6.1 per cent, according to the National Sample Survey Office's (NSSO's) periodic labour force survey (PLFS).

Moreover, demonetisation caused a 2-3-percentage-point reduction in jobs and national economic activity in November and December 2016, according to a research.

Between 2016 and 2018, five million people lost their jobs and the labour force participation started declining suddenly between September and December 2016 for both urban and rural men. The rate of decline slowed down by the second half of 2017, but the general trend had continued and there had been no recovery.

Business Standard

88 lakh taxpayers didn't file returns in demonetisation year: Report

There are several reasons that could have led to the spike in stop filers. The two main reasons could be - job loss and drop in income.

Income-tax returns (ITRs) have seen a surge post demonetisation and GST introduction, and the government claims these numbers suggest a surge in tax compliance in the country. However, according to Indian Express as many as 8.80 million taxpayers turned out to be 'stop filers' - those who did not file tax returns in a given year despite doing so in previous years- in the financial year 2016-17 - the year Prime Minister Narendra Modi demonetised high-value currency notes.

(Business Standard)

Records accessed by The Indian Express reveal a massive spike in the number of “stop filers” in the same year, reversing a four-year trend. In 2016-17, the number of stop filers jumped 10-fold to 8.80 million from 856,000 in 2015-16, the highest increase since 2000-2001.

Who are 'stop filers'?

Stop filers are individuals who filed returns previously but didn't do so in the current year. They do not include taxpayers who have passed away or whose PAN cards have been cancelled or surrendered.

Here's what the latest report on 'stop filers' reveals

In 2013 the number of stop filers was 3.75 million. Since then there was a continuous slide in the number of stop filers. It slipped to 2.70 million in 2014, 1.63 in fiscal 2015 and 856,000 in fiscal 2016.

Records show that the trends reversed in 2017-2018. The number of stop filers jumped to 8.80 million, highest in almost a decade.

Reasons behind the spike in stop filers in 2017-2018

There are several reasons that could have led to the spike in stop filers. The two main reasons could be

— job loss

— drop in income

The Indian Express quoted officials as saying that the number may have increased because of a fall in economic activity. “Typically, the number of stop filers reflects a compliance and enforcement gap, which the tax administration fails to enforce,” said an official. “But this huge increase in stop filers for 2016-’17 cannot be attributed to sudden changes in compliance behaviour. The spike could be due to a fall in income or loss of jobs during the year.”

PM Modi used demonetisation to help crony capitalist friends: Rahul Gandhi

Gandhi said the Rafale fighter jet deal was also a scam to help one of Modi's crony capitalist friends.

Congress president Rahul Gandhi on Thursday said the Reserve Bank of India (RBI)’s annual report has proven that Prime Minister Narendra Modi’s demonetisation decision was a “huge scam” and its objective was to rob from the common people of India to benefit his crony capitalist friends.

Addressing a press conference at the Congress headquarters, Rahul Gandhi said demonetisation was no error of judgement on the PM’s part. He said it was implemented “deliberately” to return the favours done to him by his 15-20 crony capitalist friends, who have spent money for his marketing on television channels.

“Prime Minister Modi should answer why he inflicted a deep wound like demonetisation when issues like unemployment and low gross domestic product (GDP) rate remained,” Gandhi said.

ALSO READ: Demonetisation not mistake, but deliberate assault on people: Rahul Gandhi

The Congress chief, who is scheduled to leave for a pilgrimage to Kailash Mansarovar, said the bunch of crony capitalists who are friends with the PM have run up huge loans taken from banks. 

He said non-performing assets (NPAs) under the United Progressive Alliance government stood at Rs 2.5 trillion and were “under control”, but have increased to Rs 12 trillion under the Modi government. He said demonetisation was designed to help crony capitalists who are burdened under NPAs by taking money from India’s farmers, women and youth.

Rahul Gandhi said “Modi’s friends” used demonetisation to convert their black money into white, and pointed to the example of the Ahmedabad District Cooperative Bank, which he alleged collected over Rs 7 billion of demonetised money. He said BJP chief Amit Shah was a board member at the bank.

He also said demonetisation failed to achieve any of its objectives, destroyed millions of jobs in the informal sector and small businesses to help big companies such as Amazon and caused 2 per cent drop in GDP.

Article Source BS