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Despite the hype, India failed to cash in on the note ban

When Narendra Modi became prime minister, he disbanded the Planning Commission and replaced it with a Niti Aayog, a governmental economic think-tank. Fair enough. His Bharatiya Janata Party (BJP) never believed in central planning in economic management. The Niti Aayog vice-chairman Rajiv Kumar was in the news this week for his attack on former Reserve Bank of India (RBI) Governor Raghuram Rajan.

Ever since the RBI (no longer under Rajan) published its annual report last week, the government has been in a panic, because of what the report says about the November 8, 2016 demonetisation of high-value currency. Modi had surprised the nation with it. In a televised address he said it would remove black money from the Indian economy. He said it would end counterfeiting and terrorism. His officials told us that of the Rs17 trillion that were suddenly valueless, approximately Rs13 trillion would return, and the remaining Rs3 trillion that was black money would be wiped out. (Or, in some official fantasies, it would show up as a dividend for the government to cover its budget deficit.)

The RBI has now counted and checked and shredded the returned notes, and it says 99.3 per cent of the demonetised currency returned. The remaining Rs130 billion is assumed to be in neighbouring countries, given how loudly Nepal protested against the sudden move. Apologists subsequently reasoned black money was evidently not kept in cash but in gold and real estate. Then what was the need for demonetisation, which put the common citizen in queues - for their own money - for the following three months?

The RBI, apparently as unprepared as Modi's own Cabinet, went into overtime to print new currency notes. It took counterfeiters no time at all to counterfeit new notes. Those who used to conduct illegal transactions with 1000-rupee notes now got to do it with 2000-rupee notes - which they could not have complained about. (Incidentally, the first reports of counterfeiting came from Modi's home state Gujarat.) Terrorism did not end.

Modi then told the nation that demonetisation would turn India cashless. Nearly three years later, India has not switched to digital payments in a big way - the transformation is continuing as slowly as before. The World Bank a few months back concluded that India had a long road to meaningful digitisation of its economy.

Not surprisingly, cash in the Indian economy is now higher than it has ever been. The RBI annual report shows us that currency as a component of Gross National Disposable Income is now twice as much (2.8 per cent) as it was before demonetisation (1.4 per cent). Deposits as a component of GNDI have crashed to a low 2.9 per cent as opposed to what it was before demonetisation, i.e., 6.3 per cent.

Demonetisation might have been an economic disaster, but it was a political windfall for Modi in the April 2017 Uttar Pradesh assembly election that the BJP swept. From most accounts, the poor queued up at voting booths happily because they thought that Modi had stuck it to the rich. Now we know that the rich suffered the least, but Modi got what he wanted. As with everything that Modi does, demonetisation amounted to grand theatre but no tangible long-term good for the country. Indeed, for some of Modi's cronies, it was an occasion to launder money. The Jan Dhan accounts, savings accounts for the poor that mostly had a zero-balance, saw a surge in deposits in the 50-day window the government gave for old currency notes. Each deposit equalled the Rs50,000 limit set by the government.

Various officials have defended demonetisation after the RBI's recent report, but Rajiv Kumar went a step further and said two things: one, demonetisation did not hurt the economy; and two, the economic mess currently is all Rajan's fault. This is ironic, given that Rajan was not given an extension due to his opposition to demonetisation.

Kumar says the current economic mess is because of the banks' bad loans: they increased during Rajan's time. Bad loans, or non-performing assets, increased because Rajan forced banks to stop hiding the NPAs and clean up their books. Kumar, like the economic affairs secretary or the finance minister, parrots the line that demonetisation has served its purpose - without explaining how. The finance minister claimed that demonetisation widened the tax net. One, this was never the stated aim. Two, the widening of the tax net has happened at the same rate as before demonetisation, meaning it is a natural rate of growth of taxpayers. Three, tax collections have not increased even if the number of payers has - implying that it is salaried workers who have come under the net whose tax is deducted at the payroll.

At least when the Planning Commission was around, its members behaved with dignity and not like lackeys of the government of the day. Rajiv Kumar, with his craven manner, and his thin and vacuous defense of the damaging demonetisation, proves that experts nowadays only serve the ruling party, and not their nation.

Aditya Sinha is a senior journalist based in India