Note-bandi: Giray toh bhi taang upar!

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'Silent Sardar' former Prime Minister Manmohan Singh predicted that 'note-bandi' would lead to a decline of two percentage points in India's Gross Domestic Product (GDP). He was right; GDP growth declined from 7.9 per cent to 5.7 per cent.

It's official. The Reserve Bank of India (RBI) has revealed in its Annual Report that almost 98.96 per cent of the Rs500 and Rs1,000 currency notes that were withdrawn from circulation on 8 November 2016 have been deposited in banks.

On 8 November 2016, when Prime Minister Narendra Modi declared Rs500 and Rs1,000 currency notes to be illegal, he said it would break “the grip of corruption and black money”. The expectation was that between Rs3 lakh crore to Rs5 lakh crore of the Rs15.44 lakh crore of the banned notes — black money — would not be be deposited in banks. This 'profit' could then be deployed for social welfare schemes and infrastructure projects

But the reality is that only Rs16,000-odd crore failed to make it to banks. It cost the RBI Rs 7,965 crore to print new currency notes. These notes had to be flown all over the country, raising the RBI's total expenditure for the year by over Rs16,000 crore; almost exactly as much as it earned through demonetisation.  

Soon after note-bandi, the 'Silent Sardar', former Prime Minister Manmohan Singh, strongly criticised the move, saying that it would hurt small industry, the farm sector and the informal sector. Mr Singh predicted it would lead to a decline of two percentage points in India's Gross Domestic Product (GDP). He has been proved right on almost every point. GDP growth has declined from 7.9 per cent to 5.7 per cent.

Now, Finance Minister Arun Jaitley claims that “confiscation of money” was not the objective of note-bandi. He says till the end of May 2017, a total of Rs17,526 crore was found as undisclosed income and Rs1,003 crore was seized. That's all? Figures for the years before note-bandi were around the same.

He also says there is a substantial increase in the number of Income Tax Returns filed. True. But the average taxable income reported in those returns is Rs2.7 lakh — just above the tax threshold.

He says the government has identified more than 37,000 shell companies that were hiding black money and hawala transactions. Did we need note-bandi for that?

Mr Jaitley says funding of terrorist and naxalite groups has “stopped almost entirely” since note-bandi. Really? Stone-pelting by mobs and attacks by militant groups in Jammu & Kashmir have increased. The Sukma ambush of CRPF personnel shows that Maoists are still very active. If indeed funding has stopped, there's nothing on the ground to show for it.

The Finance Minister says the government has been able to manage the transition extremely effectively, and with the "least pain". Crores of people stood in queues; 104 people died. Many small and medium enterprises failed, and around 15 lakh jobs were lost. The economy growth rate slipped from over 7.9 per cent in Q1 2016 to 5.7 per cent in Q1 2017. Mr Jaitley himself admits that the manufacturing sector is in crisis.

To say that note-bandi achieved its objectives is disingenuous, if not an outright lie.  

Has it been an outright failure then? No. It has brought more money into the banking system, engendered greater compliance with tax laws and increased digital payment systems. But these gains could have been achieved by much simpler and far less destructive measures.

Prime Minister Narendra Modi said in his Independence Day speech that those who laundered their black money through note-bandi will be punished. Eight months have passed since note-bandi ended on 31 December 2016. All that the Income Tax authorities have done to date is send notices. Not even one case has been filed. Do our Income Tax authorities have the necessary resources (or the will) to track down and penalise the corrupt?

If not, the net result of this entire exercise, which hurt the poor immeasurably and robbed the country of its economic momentum, will have been to convert the black money of the rich into white.