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DeMo report card: More work is needed to realise demonetisationís benefits, economic growth also needs revival
Updated:Aug 31, 2017
 
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One of the enduring mysteries of the demonetisation exercise ended when Reserve Bank of India released its annual report on Wednesday, which said that about 99% of high value notes that were stripped of legal tender status on November 8 had been returned to the banking system. That is, Rs 15.28 lakh crore of the erstwhile Rs 500 and Rs 1,000 notes had come back. This has triggered a misplaced debate on the exercise’s efficacy. A single indicator such as notes deposited cannot capture the full impact of a blunt tool like demonetisation. It requires a broader approach.
 
Demonetisation, as envisaged by the Modi government, relied on surprise to flush out black money and fake currency notes. It was bound to be disruptive. Granted this caveat, the exercise was not managed well. The inherent disruption was worsened by frequent change of rules governing demonetisation. Cumulatively the disruption intensified a slowdown in the economy, which is highlighted by the fact that GDP growth in the April-June quarter was 5.7%, a dip of over two percentage points compared to the previous year. This has really hurt job creation and also undermined agricultural trade in a year when rainfall was adequate.
 
The nature of the demonetisation process meant that its costs would be upfront. It also has benefits which will show up over a period of time. Perhaps the most important benefit has been in terms of signalling. The message sent was that tax compliance would be prioritised. When demonetisation is juxtaposed with the transition to GST, India has taken an important step towards greater formalisation of its economy, which is essential. Plus, finance minister Arun Jaitley has observed that demonetisation widened the tax base. In this context the Economic Survey estimated that demonetisation by itself added 5.4 lakh taxpayers.
 
Much more work is needed to actualise all potential benefits. For instance, after an initial surge, some key indicators of digitalisation of retail transactions such as debit card usage at shops have dipped. To move digitalisation forward, India’s network quality needs to significantly improve. Separately, tax authority’s data mining skills need to be enhanced to make the most of bank data thrown up by demonetisation and the transition to GST. Finally, NDA cannot afford to take its eye off the economy in the midst of a slowdown.
 
 
 
 
 
 
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