Demonetization 101
- India is a cash based economy. Most people, apart from the few doctors, lawyers, engineers etcz, are paid in cash and in turn pay for everything in cash.
- Since many businesses operate entirely in cash, revenue figures and tax payments are entirely self reported. The govt sees less tax receipts than it thinks it should.
- in November 2016 the govt decided that all high value notes were no longer legal tender and had to be returned to banks. The idea at the time being that businessmen who had hoarded mountains of cash would be forced to let their wealth disappear or deposit it and explain their sources of income. Also, people indulging in illegal activities such as politicians accepting bribes would be forced to throw the money away
- That's not what happened.
- As I said, the economy is cash based. With everyone's cash invalidated and the ATMs requiring retooling before they could work with the new notes, the economy ground to a halt. People stopped making purchases they otherwise would have, both large and small. They bought fewer TVs and washing machines, and also fewer cigarettes, fewer meals at restaurants, fewer clothes, fewer vacations. Every single sector saw their revenues fall, and a lot of people, mostly rural, lost their jobs. Farmers at the time were selling their produce for less than a tenth of what they did previously because they were desperate for money. So yes, GDP took a hit. But it's cool because the govt fudged the figures and made it appear better than it actually was.
- The real kicker however, is that the people with mountains of cash figured out ways to move that money into their accounts without raising any eyebrows. Brokers that did this merely took a 10-15% cut, rather than the 30-45% cut the govt hoped to take. 99% of notes were returned, hardly the success the govt hoped for.
- Later they changed the goalposts, claiming that the goal of this exercise was to promote digital payments, not catch the tax dodgers. Hogwash.
So to recap
1. Govt comes up with stupid scheme.
2. Implements it poorly when replacement notes are not available.
3. Scheme fails, innocent people are hurt, jobs are lost, growth grinds to a halt.
4. Govt shifts goalposts and claims victory.
Sources
1. The high economic costs of India's demonetization - https://www.economist.com/news/finance-and-economics/2171384...
2. Growth remains sluggish a year later - http://m.economictimes.com/news/economy/indicators/most-accu...