Vol. XLI No. 46 November 12, 2017

One Year after Demonetisation

Prabhat Patnaik

IT is exactly a year ago that Narendra Modi had announced the decision to demonetise, at four hours’ notice, as much as 86 per cent of the total currency of the country. After one year it is clear that none of the objectives that demonetisation was supposed to achieve has been achieved. This should not come as a surprise; indeed so obviously inapposite the measure had been for achieving its stated objectives that most economists, cutting across the ideological spectrum, had predicted its futility. What it has achieved instead of its stated objectives is a huge blow to petty production and petty trade, or what in officialese is called the “informal sector”.

The most commonly stated objective of demonetisation had been to attack “black money”. It had been suggested that while honest people would have no hesitation in coming to banks to deposit old notes or to exchange them for new ones, the black money operators would not dare to do so, which would mean that the old notes in their possession would simply get disabled, thereby crippling the black economy. A sum of Rs 3.5 lakh crores was estimated to get disabled in this manner. And so confident had the government been about the size of such disabled currency-value that various plans had been mooted about how this amount, which would represent a windfall for the Reserve Bank (whose liabilities would go down correspondingly) and hence for the Government of India (which owns the Reserve Bank), could be made use of. We now know that only Rs 15,000 crores have not come back to the banking system, and much of this amount too is not from the “black economy”. The “black economy” in other words flourishes as before.

Faced with this fact, Arun Jaitley has now done an about turn and claimed that the government’s aim all along had been to “flush out” the old currency hoards and not to disable them; ie, that demonetisation’s success lies not in the amount of money returned to banks but in the amount of money not returned. But even as he puts forward this disingenuous argument, he cannot explain how such “flushing out” can possibly hurt the black economy.

Some official spokesmen have pointed to the number of cases that are now open to investigation (because of the size of the cash that was brought to banks in each case) as a triumph of demonetisation. But these cases have little to do with the black economy as such; on the contrary the black money operators are precisely the ones who would have been wily enough to avoid being caught in any such investigation. Besides, since these investigations will take an inordinate length of time, they scarcely constitute an attack on the black economy.

For a while another disingenuous claim was made, namely, that the number of taxpayers has gone up post-demonetisation; but it was soon discovered that the rate of growth of the number of tax-payers (which is always positive anyway) has actually come down post-demonetisation.

The second stated objective of demonetisation had been to get rid of counterfeit notes. This was an absurd justification for the measure anyway. The Indian Statistical Institute’s estimate for the value of counterfeit currency as a proportion of total currency was a mere 0.025 per cent; and one does not demonetise 86 per cent of the currency to get rid of the 0.025 per cent which is counterfeit. And even if one is foolish enough to do so, there is absolutely no need to do so with immediate effect causing great hardship. Exchanging old notes for new ones over a longer period would have achieved the same goal anyway. Moreover, it also turns out, the value of counterfeit currency that has come back to banks after demonetisation is a mere 5 per cent of even the ISI estimate of counterfeit currency, so that even this objective has proved elusive.

The third objective that was dragged in later was a move towards cashless transactions. This was an unjust objective anyway, since cash transactions are costless while cashless ones entail a cost, so that pushing people towards cashless transactions amounts to a forcible transfer of purchasing power from their pockets to those of financial companies that manage such transactions. Even here however we find that as cash has got back to the system through re-monetisation, the relative magnitude of cashless transactions has declined, indicating a move back to square one.

While demonetisation has thus been a singular failure in achieving its stated objectives, it has dealt a body-blow to the petty production and petty trade (“informal”) sector which employs over 85 per cent of the country’s work-force and produces about 45 per cent of the GDP. The harm done by demonetisation on this score had been disputed when the fourth quarter GDP estimates for 2016-17 had come out showing no large drop in the year-on-year growth rate. But the 2017-18 first quarter estimates confirm a significant slowdown.

The GDP growth-rate figures however are not the right things to look at in this context. Agriculture for instance employs nearly half the country’s work-force while contributing, in statistical terms, only 15 per cent to its GDP. A 1 per cent drop in the agricultural growth-rate therefore, say from 3 to 2 per cent, means an almost 1 per cent drop in the income of an average member of the agriculture-dependent population, but only a 0.15 per cent drop in the GDP growth rate. The GDP growth-rate in short can give a misleading picture of the impact of a measure like this on the lives of vast masses of the people.

There is an additional factor of great importance here. Even when the GDP growth rate does not drop, its sustenance may be ensured through greater indebtedness of the peasantry. Indeed this is precisely what has happened after demonetisation. Since the peasants lacked purchasing power because of demonetisation, they took loans for their inputs from the input-providers inter alia which undermined their economic viability. Field-studies conducted over large tracts of the country testify to this fact.

This increase in indebtedness incidentally is also the reason why the argument often encountered even among the critics of demonetisation, that it can only have a transitional effect, and that as re-monetisation occurs its adverse consequences will disappear, is wrong. It leaves behind a legacy in the form of higher debt among peasants and petty producers, which makes their economy even more precarious.

Demonetisation together with the Goods and Services Tax that came a few months later, has had the effect of undermining petty production (the GST because it entails heavier taxation of this sector than ever before). These two measures together have been used as weapons in the hands of the government for effecting a process of primitive accumulation of capital.

A neo-liberal economy anyway is characterised by a process of primitive accumulation of capital since whatever protection from this process that petty production enjoyed during the dirigiste period is withdrawn under neo-liberalism. But the Modi government, not content with merely allowing the unleashing of primitive accumulation of capital upon the petty production sector by international finance capital and the domestic corporate-financial oligarchy associated with it, has on its own, quite deliberately and gratuitously, imposed a direct squeeze by using the instrument of the State.

There is however a difference between the spontaneous unleashing of primitive accumulation by big capital on petty production, and the direct inflicting of such primitive accumulation by the State. In the latter case, the multiplier effects of the State-imposed squeeze on petty production are also felt by the capitalist sector which sells its goods to the former, resulting in a generalised tendency towards recession in the economy.

This is what we find today in the case of India. The economy is suffering not only because of the impact of the world capitalist crisis which is now beginning to spread to the third world from the metropolis, but also from the Modi government’s ruthless and mindless measures like demonetisation and the GST.

If this direct State-imposed squeeze on petty production and trade, which impoverishes and displaces persons from this sector, was accompanied by an increase in employment in the capitalist sector, then the hardships of those affected could be viewed as merely transitional, a necessary accompaniment perhaps of a historical march-forward. But since the squeeze on petty producers and traders and all those, including the labourers, employed in this sector, is occurring at a time when employment in the capitalist sector is shrinking, what is actually happening is an immense increase in the poverty and degradation of the masses.

Indeed the government’s own Labour Bureau data show that “usual principal status” employment in the age-group 15 years and above has actually declined in absolute terms by 37.4 lakhs between 2013-14 and 2015-16. The immense damage caused by the Modi government’s policies have to be locatedwithin this context.