“Experts” Don’t Get It; “Extinguished Cash” Is Now Meaningless To Judge Demonetisation

What’s the yardstick to judge the success or failure of demonetisation?

“Experts” Don’t Get It; “Extinguished Cash” Is Now Meaningless To Judge Demonetisation

I don't think India's "experts" – that unwieldy phalanx of parliamentarians, bureaucrats, economists, columnists, blue screen anchors – quite get demonetisation. They have been consistently behind the curve on understanding the phenomenon unwittingly unleashed by a government which had no clue it was mounting The Demon, that too without a lifeline.

Within 24 hours of the prime minister's reckless announcement, I had written how almost all the money would come back via a torturous route, creating new troves of black cash with touts and unscrupulous bank managers who would enrich themselves with the "30-40 percent conversion premium". I had suggested an alternate route which would have achieved exactly the same end point, but without causing any pain or disruption AND kick-starting a fantastic consumption/investment boom. It was a win-win plan, which was criticised by many who lived in the realm of theories or ideological fantasies.

The Win-Win-Win Plan That Could Have Been

Within another 12 hours, that is, 36 hours after the PM's un-thought-through currency cancellation, I added another win to the win-win idea. I suggested that the Voluntary Disclosure of Income Scheme (VDIS) should be extended up to December 31, to coincide with the drop dead date. Simultaneously, ordinary transactions in Rs 500 and Rs 1,000 notes could be restarted. The end point would have been truly virtuous. No pain for common citizens, massive tax collection in government coffers, no case to create a new parallel economy of touts, and a fully streamlined replacement of the economy's cash.

Alas, the government took 25 days to see reason and brought back a new VDIS – but in that time, almost all the black horses had bolted the stable! If only they had done it right at the beginning, all the tainted cash now sloshing around with "conversion touts/pimps" would have flown into the treasury instead of enriching criminals.

Rs 11 Lakh Crore in The Bank: Good, Bad or Ugly?

Now to the latest bit of data agitating our “experts”, that is, at what amount of cash deposits should we declare Modi’s demonetisation a success or failure? Rs 10 lakh crore or Rs 12 lakh crore or Rs 14 lakh crore?

The reasoning is as follows: the government hoped to extinguish about Rs 4 lakh crore of "black cash" which scamsters would fail to bring into legitimate bank accounts. That would, effectively, mean a "free" transfer of resources from the villains to the hero, that is from black cash hoarders to Modiji's Bharat Sarkar, which would then splurge this bounty on India's poor (the road to hell is paved with good intentions conjured up for India's hopeless/hapless poor!).

But heck, now that Rs 11 lakh crore has already come in, with another 4 weeks to go, has demonetisation flopped, bemoaningly ask the "experts"?

New Yardstick to Judge Success/Failure of Demonetisation

My apologies to all the "experts", but this question is redundant, silly and irrelevant now. Why?

Because once the government has declared a tax amnesty, that is VDIS, every single penny will come back into the banks. Why would anybody leave even a twisted farthing on the road, since it’s now “legit” to pay a penalty on it and deposit it in your account. Even a quarter salvaged is better than a quarter wasted, right?

So the full amount of Rs 15 lakh crore will come back. Period. QED.

Then how do you judge whether demonetisation has succeeded or failed? What is the new yardstick if it's not the amount of "black cash extinguished"? Quite simple really: watch for these two data points:

  1. Amount deposited as penal taxes under the new VDIS
  2. Amount locked in 4-year zero interest deposits (which will be a confirming derivative of 1)

The higher these amounts, the more successful it's been. And to rub it in again, had the VDIS been declared right upfront, along with demonetisation, these amounts would have scaled records. But now the jury is out because most of the black horses have bolted!

So much for our "experts" who are still getting excited that Rs 11 lakh crore have come in, with 4 weeks still to go. So what?

Raghav Bahl is the co-founder and chairman of Quintillion Media, including BloombergQuint. He is the author of two books, viz ‘Superpower?: The Amazing Race Between China’s Hare and India’s Tortoise’, and ‘Super Economies: America, India, China & The Future Of The World’.