The book under review by C Rammanohar Reddy is a timely addition to the literature on demonetization and indeed a very comprehensive one at that. Directed at the lay reader, it provides a succinct discussion of the context, history, and impact of the November 8, 2016 demonetization announcement by Prime Minister Modi that rendered all currency notes of Rs. 500 and Rs. 1000 illegal for use in transactions. These currency denominations formed about 86% of the total notes in circulation and given that India is predominantly a cash based economy, the economic disruption that ensued was monumental. The primary and very important contribution of the book is the construction of a narrative about the impact of policy shock when there was hardly any real time official data available as the shock rippled across different sectors of the economy.
The book is divided into four sections of roughly 3-4 chapters each. The first section deals with the concepts of black money and black economy and its estimation. It also outlines the Indian and global experiences with demonetization as 2016 was not the first time that such an exercise was carried out in India or in the world.
Section II details the action on black money in years prior to 2016 and provides a rich discussion of the context, design, and implementation of the 2016 demonetization exercise. Section III chronicles the substantive human impact of the policy action and provides a brief
discussion on the connection between
black money and politics. Section IV details the impact of demonetization on the
banking system and the RBI. It concludes with a discussion on what lies in future after such a major policy shock for the Indian economy.
The initial chapters talk about basic notions of black money and black economy in detail along with the issues related to its estimation especially given its overlap with the overall shadow or informal economy. The author correctly points out the flows of black money in and out of legal transactions making it hard to tackle and account the extent of it. Further in the first section, the book presents a detailed discussion of alternative options to demonetization that could have been less disruptive and possibly more effective. It provides a very interesting historical context to the current demonetization exercise in terms of the ones implemented in 1948 and 1978 and lessons that were highlighted from those policy episodes.
What is the size of the black economy is a difficult question as there is no one way to tease out the measure from the available data. The author clearly outlines the different approaches that have been used so far and what we can conclude about the size of the black economy in India from these exercises. He talks about the literature on shadow economy reviewed in Enste and Schneider (2000) and related literature but quickly discounts it arguing that the reasons for the existence of informality in India is different from that in developed countries. I think that such a conclusion may be premature given that the countries studied in this literature are not just developed ones but a considerable number of middle- and low-income countries.
The main criticism against this literature though, as Jim Thomas (1999) successfully argues, is the lack of theory behind all the measurement exercises.
In Section II, the author acknowledges that demonetization is not the only or even an effective way to address generation of black money hoarded by some. It comes at the cost to many. He provides a detailed discussion and analysis based on the white paper that was brought out in 2012 by government in response to the public outcry against the issue of pervasive corruption. He points out that black money transactions take place in cash as well as through the financial system and therefore the obsession with minimizing cash transactions is totally misplaced. In ‘Promotion of “Less Cash” Economy’ (p. 87), he tackles the issues involved in the shift towards digital payment systems. The chapter highlights the state of the existing infrastructure as compared to the requirements for a successful digitalization. It also includes a brief discussion of changes in official narratives surrounding the policy from an action against black money to a movement towards ‘less-cash’ economy.
In Section III, ‘Distress and Despair’ (p. 105) gives the details of the impact of demonetization on the economy based on the richly documented experiences of people and episodes of despair resulting from loss of incomes and employment from all the sectors in the economy. The discussion is primarily based on media reports that the author has collated to successfully construct a cohesive narrative of the human impact of demonetization. Despite the regional variation in this impact—for example, agricultural produce was harvested after November 8 in the North and prior to that in the South leading to a differential impact of liquidity shortage—a collective reading of such reports clearly shows that more or less all the sectors were affected immediately or eventually. The shock hit the vulnerable sections of the society, i.e., the informal economy, casual agricultural workers, hardest. Reading all the gut-wrenching stories of the people impacted by this policy, one gets an effective glimpse of the human impact of the policy shock.
Reddy talks about the pervasive use of black money in politics making clear the vested interests of all the political parties in not raising the issue of politics and black money.
The author clearly spells out the Herculean task that the RBI faced in terms of remonetizing the economy as fast as possible. Given the discussion on the capacity of printing presses and logistics involved in replacing currency notes, it is probably not surprising it took almost two years for the currency in circulation to go back to its pre-demonetization level.
While providing a clear discussion on the impact on RBI’s balance sheet and the accounting of its transactions with the Central government, the author highlights the impact on RBI’s credibility and reputation. The chapter on black money and gold rightly points out the special place gold has in
Indian society—especially related to women’s rights and their financial security. Therefore, it might be prudent to concentrate on
other sources of black money than disturb the current status quo in relation to gold holdings.
In the concluding chapter ‘What Next’, the author outlines his thoughts on what lies or should lie in the future of the Indian economy after demonetization of 2016. In relation to the digitalization narrative he points out that considerable progress was being made independently on digitization of payments, financial inclusion, mobile payments, electronic clearing and settlement systems, and so on in the years prior to 2016. The most important question therefore remains—was it really necessary to put the economy through the unprecedented distress and despair to steer it in the direction that RBI had already been pursuing for at least a decade prior? The latest data release that showed that the economy indeed slowed down considerably for at least four quarters (CSO 2018) and that almost all the demonetized currency was deposited in the banking system (RBI 2018) only vindicates the author’s analysis of what can be termed as a colossal policy mistake in the history of Independent India. I think the author drives home the point successfully towards the end of the book that tackling the problem of the black money will require fundamental changes—one that includes changes in ‘governance, practices, and attitudes’ (p. 188). These changes go to the heart of the institutional framework that governs the economic, social, and political life of us as Indians and require serious and deliberate policy initiatives than dramatic but ineffective policy surprises like demonetization.
CSO, 2018, Press note on provisional estimates of annual national income, 2017-18 and quarterly estimates of gross domestic product for the fourth quarter (p. 4) OF 2017-18.
Dominik H. Enste & Friedrich Schneider, 2000, ‘Shadow Economies: Size, Causes, and Consequences,’ Journal of Economic Literature, American Economic Association, vol. 38(1), pp. 77-114, March.
RBI 2018, Annual Report 2017-18.
Thomas, Jim, 1999, ‘Quantifying the Black Economy: “Measurement without Theory” Yet Again?,’ Economic Journal, Royal Economic Society, vol. 109(456), pp. 381-389, June.
Parag Waknis teaches economics at the School of Liberal Studies, Ambedkar University (AUD), Delhi.