While the defenders and critics of the demonetisation of Rs 1,000 and Rs 500 high-value currency notes on November 8, 2016 and the rollout of the Goods and Services Tax (GST) on July 1, 2017 clash with each other on Twitter, on Facebook and the paleolithic press conference, the Reserve Bank of India has referred to the two controversial measures as only a central bank can do — in forbiddingly bland language — in terms of the aftereffects, without either praising or condemning them.
It has referred to demonetisation in its 2016-17 annual report that was released on August 30, 2017 as well as in the 2017-18 report released in August 2018. While in the 2016-17 report, the refrain of the Reserve Bank was how it had dealt with the cash crunch crisis created by the demonetisation decision, and how it had executed the process of the remonetisation through printing of the new notes and rushing them to banks and automated teller machines (ATMs) across the country “to meet the legitimate demand of the public in the shortest possible time.” Remonetisation is not a word that was used in the months after demonetisation, because what was actually happening on the ground was remonetisation. The critics did not refer to it, nor did the government.
The theme recurs in the bank’s 2017-18 report that was also released on August 30, 2018. In the chapter titled, “Currency Management”, it says: “The focus of currency management during 2017-18 broadly remained on remonetisation...” apart from carrying out the “humongous task of processing and verification” of the demonetised Rs 1,000 and Rs 500 notes which were deposited in the banks and returned to the RBI. It turned out that 99.3 per cent of the Rs 1,000 and Rs 500 notes in circulation have been accounted for. Finance minister Arun Jaitley, in his Facebook blog, has argued that this does not delegitimise the demonetisation decision. He has argued that there has been an increase in the number of people who filed income-tax returns, and that there was an increase in the collection of taxes into the government’s coffers as well.
At more than one place, the RBI’s report says that the prospects of the economy in 2018-19 look better because the economy is coming out of the aftereffects of demonetisation and the rollout of the GST. It points to the fact that there has been a recovery in agricultural, industrial output, an increase in export earnings of the services sector through better software programs. The dangers are out there, in terms of rising international crude oil prices, global trade wars, increase in interest rates in the United States and other advanced economies (AEs), which result in the exit of foreign funds from India and other emerging market economies (EMEs). The bank thinks that India clocking a higher rate of fourth quarter growth in 2017-18 is laudable and that it would be possible for it to sustain an improved growth rate in 2018-19 as well. The caveats are there about the risks that could dampen the prospects.
What is quite interesting in the report is the tax collection figures for 2016-17, 2017-18 and 2018-19, both direct and indirect. They tell an interesting story on their own. There has been a gradual increase in gross tax revenues, which includes both direct and indirect taxes, from 10.6 per cent in 2015-16 to an estimated 12.1 per cent in 2018-19 through 11.2 per cent in 2016-17 and 11.6 and 11.4, according to the revised estimates and provisional accounts. This means that there have been no dramatic hikes in tax collections as the government would like us to believe.
On the demonetisation front, the RBI had to execute remonetisation and put money back into circulation. The government wanted to pull out the money from the system so that people would go digital, but the cash in circulation is much more now than it was before demonetisation in November 2016, and the spurt in digital transactions has risen and then came down before rising marginally. Demonetisation created disturbances of many other kinds as well. It created a liquidity crisis, and the central bank had to deal with it through reverse repo rates so that it could absorb the excess liquidity from the retail banks. It also meant that the bank credit offtake too fell because the banks could not lend at reasonable rates when they were sitting on heaps of liquidity. It is surprising that the advocates of demonetisation want to overlook the disturbances that occurred in the banking system.
Quite strangely enough, the government and the ruling party seem to believe rather naively that demonetisation and GST together could be showcased as achievements on the economic front. The RBI report, which is as neutral as neutral can be, has laid out the problems that arose from demonetisation, and there is no evidence about the good that has come from GST. It can be argued that the critics are virulently biased against these measures despite their positive points. But the RBI is, after all, no ideological opponent or rival of the government, and the neutral tones in which it explains these two measures show that the government cannot blow its trumpet on these matters.
The government can boast about many welfare measures but these do not reflect the achievements of the economy because they are more populist than economic. The economic measures appear to be demonetisation and GST, and they happen to be problematic. This is the proverbial horn of the dilemma. The government can’t claim credit for it, but it also can’t afford to ignore them as if they didn’t matter. Demonetisation and GST may yet turn out to be a liability in the long run.