Modi’s Indian Demonetisation Worked – Dependent Upon Your Meaning Of Worked Of Course

Narendra Modi suddenly upped and announced that all Indian banknotes worth above a pittance were invalid. New notes would be issued at some point, all the old notes well, the only way for them to retain their value would be to deposit them in a bank. Chaos ensued – not that chaos is a rarity in the Indian economy. There was some thought that all that black money floating around would not be processed through the banks and that this would produce a dividend for the government. A bank note being a debt owed by said government to whoever possesses it of course. It didn’t quite work out this way, for near all those notes were processed through bank accounts, and thus some insist that it was all a failure, the chaos – and the deaths for yes, people did die as a result – was all for nothing.

This also isn’t quite true. As I said in another place back then:

The only practicable method of retaining the value of those old notes was to deposit them into the banking system. However, we should also note that those same amounts of cash which have been deposited are now inside the reporting system for tax. And undoubtedly there will be some decent portion of those deposits which were formerly black money and which now will be righteously taxed.

That is, even if all the money was recycled into the new notes, those scofflaws who had been piling up the cash didn’t lose chunks of it, it could still have been a success. And, well, was it?

Expansion of Taxpayers base Per published data, the number of Income Tax returns have zoomed by 57% since demonetisation
IT returns filed in FY14 were 3.79 crore
IT returns filed in FY16 was 4.36 crore, implying that growth over 2 years period before demonetisation was 15%
IT returns filed in FY18 was 6.84 crores, implying that growth over 2 years period after demonetisation was significantly higher at 57% Number of High Net Worth individuals, declaring income above Rs 1 crore, has surged by 68% since demonetisation Filers with 1 crore+ declared income in AY15 were 48,416
Filers with 1 crore+ declared income in AY18 were 81,344 (up by 68%)
Filers with 1 crore+ income, added in 69 years before demonetisation were 48,416
New filers with 1 crore+ income, added in just 2 years after demonetisation were 32,928 A surge in Direct Tax collections The direct tax growth rate has soared to a 7 year high of 17%
FY15 – 8.9%
FY16 – 6.9%
FY17 – 14.6% (noticeable jump in growth rate after demonetisation)
FY18 – 17.1%

Yes, you’re right, the government being able to extract more from the population in tax revenues is not what we normally call a success around here. But the Indian taxation system was the other side of ludicrous to begin with, it did need to be made more efficient. And that demonetisation process does seem to have managed that. So, yes, we should be calling Modi’s demonetisation in India a success.

There is another point here too, one I’ve been making since the event. Economies work better if people think they’re fair. No, not in detail, but just roughly and on average. If the mass of the people think everyone’s playing by roughly the same rules then everyone rubs along together rather better. That wasn’t a belief common in India – it wasn’t part of the reality either. Whether or not demonetisation confiscated the black money, or brought more activity into the banking and thus tax net, isn’t perhaps the major point at all. Rather, Modi and Jaitley showed that someone, somewhere, was going to at least try to stick it to the scofflaws. That in itself is of benefit to the Indian economy.

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Jonathan Harston

And it also makes the money useful. Instead of the Scrooge McDuck great big pile, it’s in the banking system and being lent to other people so they can use it. India shows that the third option of wealth accumulation can exist if not prevented.