NEW DELHI: It now seems that Rs.14.97L crores or almost 97% of the Rs.500 and Rs.1000 notes “demonetised” by the Modi government are in the banks.

On November 8 when he made the announcement, the three objectives the Prime Minister listed for removing Rs. 15.40L crores from the system were to filter out the “black”, counterfeit and terrorist cash from the economy. This was undeniably a laudable objective, but what did it fetch in return is a question that needs to be answered?

Sources in the government seemed to believe that about Rs.4-5L crores would not be deposited back as they would be money with dubious antecedents. This would then be the Reserve Bank of India’s bonus, which could be used to refinance the NPA’s burdened PSU banks.

But this is not to be and most of the cash outside, in flow or stock, has been deposited. So what was said to be the unsaid expectation is now best left unsaid.

But this doesn’t mean that the three main objectives stated by PM Narendra Modi remain unrealized. Quite clearly there was a good deal of tax-evaded income, counterfeit notes and terrorist funds in the system. Only counterfeit cash would have been filtered out in this first filtration.

The tax-evaded incomes will now be searched out and large deposits from the usual suspects and unexpected sources will be scanned with diligence, both for the nations as well as the tax collectors benefit. How much will it fetch the exchequer is not clear, but we can safely assume it will be a tidy sum.

Last year the RBI recorded filtering out about Rs.29 crores of counterfeit notes. But not all counterfeits go back to the banks, though in theory at some stage or the other they will have to.

How much could this be? We have often heard of a figure of about Rs.20, 000 crores of locally manufactured and Pakistani counterfeits in circulation. If it is in the flow these notes will sooner or later be intercepted at the final stage of their life when they comes to the RBI for their obsequies. But a good part will also be in stock and we will never know how much will end up in the Ganges, like it was shown on TV on November 9?

To be sure there is huge tax evasion in our system. Even if the National Institute for Public Finance and Policy (NIPFP), the Ministry of Finance’s in house think-tank, estimation of a parallel economy equal to about 68% of the GDP is not accepted and the figure of 20-25% often cited by the multilateral agencies like the IMF and other authorities is accepted, we are looking at a parallel economy of about Rs.30L crores. This implies about Rs.10L crores of lost taxes.

The demonetisation exercise would not fetch even a small fraction of it, largely because most of the undeclared income undergoes metamorphosis into property, gold and foreign holdings leaving only about 4-5% within the cash system.

So at the IMF end we are looking for about Rs.1-1.5L crores at least and at the NIPFP end we are looking for about Rs.3-4.5L crores at least. The tax gains thus could at best be between Rs.50, 000 crores and Rs.1.5L crores.

Now we hear murmurs of expectations of about Rs.4L crores, which if so suggests that the NIPFP estimates are closer to the reality? After imposing penalties (30%+30%) this should fetch the government about Rs.2.4L crores as taxation.

But remember this is for the most part of it a one-time exercise. All our past experiences show we revert back to past practices and habits. But there are only so many demonetisations one can have in a lifetime. Frequent demonetisations will only diminish the credibility of the rupee and RBI.

With currency no longer linked to gold, its value is only in its credibility and no government should keep risking this.

Against this one time gain of at best about Rs.2.4L crores what did we lose? The loss due to the unprecedented drop in production and income to the economy this year is now widely accepted by economists to be around 2% of GDP. This is almost Rs.3L crores. The cost of printing replacement notes is expected to be Rs.40-50, 000 crores.

There are huge human costs implicit too. India has a work force of close to 450 million. Of these only 7% are in the organized sector. Out of these 31 million about 24 million are employed by the state or state owned enterprises. Of the vast reservoir of over 415 million employed in the unorganized sector about half are engaged in the farm sector, another 10% each in construction, small-scale manufacture and retail.

These are mostly daily wageworkers and mostly earning less than the officially decreed minimum wages. The average daily wage in India is Rs.272, which means that it is essential to have a good part of that for a typical family to be able to escape starvation every day. Just visualize the cold hearths in these homes and children going to bed cold and hungry. At least 22 crores daily workers have suffered loss of work. We will have to await this bill.

Millions of farmers too have lost crops and produce due to the sudden drought of cash, which has impeded both sowing and harvesting. Farmers and the retail trade, which sells perishables like fruits and vegetables, have suffered huge losses due to the abrupt compression of demand induced by the demonetization.

The motorbike industry has for long been the bellwether of rural prosperity. Year-on-year sales at Hero MotoCorp, the market leader and the worlds largest two wheeler producer, slid by more than a third in December. According to the research group Nielsen, fast-moving consumer goods, usually a reliable growth sector, retrenched by 1-1.5% in November have been hit harder.

Data released by the Center for Monitoring the Indian Economy (CMIE) shows investment proposals amounting to only Rs.1.25L crores in the October-December quarter as compared with an average of Rs.2.36L crores worth of new investments seen per quarter in the preceding nine quarters that the Narendra Modi government has been in power.

While 227 new investment proposals worth Rs.8, 800 crore were announced during the quarter till 8 November, only 177 investment proposals worth Rs.43, 700 crore came in between 9 November and 31 December. The huge post demonetization fall in investment is clearly apparent.

The big question is whether the slowdown of investment is temporary or long term? It can be plausibly argued that local investment will be back but one cannot say the same about foreign direct investment. Often foreign investors look at several location options simultaneously and once a choice is made that investment are very simply gone forever.

Quite clearly the losses outweigh the gains. And did it achieve anything? Huge volumes of new currency notes have again been accumulating with individuals and corporations. Bureaucratic and political corruption is back as before.

The only palpable gain seems to be a stop of high quality high value counterfeits from Pakistani security presses. But that too will pick up in due course. It won’t be long before its business as usual.

The topmost priority for the government now should be is to remonetise the economy fully. Unless remonetisation is complete, growth cannot be restored and employment cannot be generated.

(The writer is a scholar from Harvard, and well known commentator and columnist)

(Cover photograph: A photograph carried by The Tribune, Chandigarh capturing the adverse impact of demonetisation on the vegetable market)