Those calling demonetization draconian have their priorities wrong

Dear Arvind Subramanian Ji,

With no malice towards you, let me come straight to the point. While conflicting opinions are the hall-mark of mature democracies, to wrongfully castigate the Modi dispensation after having served as chief economic advisor may be your idea of unfettered freedom of expression, but there is another word for it -- misguided opportunism. To call demonetization draconian, while having eulogised it when you were a serving officer in the government, smacks of not just hypocrisy but timidity and poor professional ethic.You chose to be mute when you should have spoken out, if indeed you felt so strongly about it, and you are speaking now when you would perhaps be better off focusing on the publicity of your new book.

You wrote in Economic Survey of 2017-18 – “demonetization has the potential to generate long-term benefits in terms of reduced corruption, greater digitalization of the economy, increased flows of financial savings, and greater formalization of the economy, all of which could eventually lead to higher GDP growth, better tax compliance and greater tax revenues.”

From a 7.9% GDP growth in first quarter and 7.5% in the second quarter of 2016-17, growth did taper off to 7% and 6.1% in the third and fourth quarters. However, the resilience of Modinomics was amply evident when from a 5.7% in the first quarter of 2017-18, growth zoomed to 7.7% in the fourth quarter of 2017-18 and 8.2% in the first quarter of 2018-19. At 7.1%, in the second quarter of 2018-19, India is still the fastest growing economy.

Besides Jan Dhan accounts, that saw inflows of over Rs 80,000 crore, another Rs 80,000 crore was repaid in cash for loans taken; Rs 10,700 crore came into bank accounts in North-Eastern states and Rs 16,000 crore into regional rural banks – all thanks to demonetization.

The more underrated and yet significant positive aspect of demonetization is the perceptible shift from physical to financial savings. More than 77 lakh new portfolios were added to the mutual fund industry, largely from Tier-II towns in 2016-17, versus a little over 35 lakh portfolios added in 2015-16 — a 120% growth. In 2017-18, about 1.6 crore portfolios were added, after an addition of 67 lakh and 59 lakh folios in the preceding two years. That the size of the MF industry rose 26% from Rs 18.30 lakh crore, to Rs 23.05 lakh crore during March 2017-March 2018 is a big vindication of how demonetization boosted financialisation of savings. 

For a country of 1.3 billion people, a disruptive measure was the only way to bring an exponential attitudinal shift in the very approach to black money. It is disappointing to note that you have missed the woods for the trees. Disruptions, including the first Industrial Revolution in the 18th century, have had huge long-term benefits, changing the destinies of nations. It is therefore entirely to the credit of Honourable Prime Minister Narendra Modi, that hoarding money is no longer fashionable. demonetization taught us what many of us had conveniently forgotten – honesty is indeed, still the best policy.

Yes, demonetization is a massive monetary shock to the more than 2.09 lakh shell companies that had their bank accounts frozen and names struck off from the Registrar of Companies list, including more than three lakh bogus directors. I hope you will graciously agree that demonetization was a shock only for those who wilfully chose to make money under a formal system but wanted to surreptitiously enjoy all the attendant perks of being part of an informal economy.

Two years prior to demonetization, direct tax collections increased 6.6% and 9% respectively. In the next two years, post demonetization, direct tax revenues rose 14.6% and 18%. Similarly, in 2017-18, the tax returns filed reached 6.86 crore, a 25% rise over the previous year. As on October 31, 2018, 5.99 crore returns were filed, a 54.33% increase over the year-ago period. The new filers added in 2018 are 86.35 lakh. From 3.8 crore tax filers under the UPA-2 regime in 2013-14 to 6.86 crore tax filers in 2017-18, under the Narendra Modi led dispensation, a resounding 80.53% jump in the tax base is one of the biggest successes of demonetization. 

Be it tax revenues, capitalisation of banks, financialisation of savings, relatively lower home loan rates, falling property prices, closure of fictitious firms, disclosure of massive unaccounted wealth, et al, demonetization won the battle resoundingly on a whole host of fronts, and those who call it draconian, clearly have their priorities wrong. 

Best regards

Sanju Verma, Economist & chief spokesperson, BJP Mumbai.