Viewpoint: Why Modi’s currency gamble was ‘epic failure’

narendra modi
The Prime Minister, Shri Narendra Modi addressing the Nation on the occasion of 71st Independence Day from the ramparts of Red Fort, in Delhi on August 15, 2017.

The devil, as they say, is in the detail.

On Page 195 of the Reserve Bank of India’s latest annual report released on August 30, 2017, lies the answer to the question, a large part of India has been asking for close to ten months.

Has demonetisation been a success or a failure? As per the RBI data released in the annual report, it is safe to say that demonetisation has been a failure of epic proportions.

On November 8, last year, the Narendra Modi government decided to demonetise Rs 500 and Rs 1,000 notes, which were worth Rs 15.44 trillion notes in total. The idea was to attack both fake currency as well as black money or unaccounted wealth. The prime minister said so in his address to the nation announcing the demonetisation decision.
This was backed up by the government press release accompanying the decision. Black money is essentially money that has been earned but on which taxes haven’t been paid.

From the midnight between November 8 and November 9, 2016, the Rs 500 and Rs 1,000 notes, were not worth anything. The people holding these notes had to deposit them in their bank accounts. This money could later be withdrawn, though there were restrictions on the amount of the money that could be withdrawn immediately.

The hope was that black money held in the form of cash wouldn’t be deposited into banks, given that people holding this money wouldn’t want to be identified. In the process, a humongous amount of black money would be destroyed.

The RBI Annual Report on Page 195 says that demonetised notes worth Rs 15.28 trillion were deposited into banks, up to June 30, 2017. This basically means that almost 99 per cent of the demonetised money was deposited into banks. Hence, almost all the black money held in the form of cash, also made it back into the banks and wasn’t really destroyed, as had been hoped.

The conventional explanation for this is that most people who had black money found other people, who did not have black money, to deposit money into the banking system.

As far as detecting fake currency is concerned, nothing much seems to have happened on this front. Data from the RBI annual report tells us that the number of fake Rs 500 (old series) and Rs 1,000 notes detected between April 2016 to March 2017 was 5,73,891. The total number of demonetised notes stood at 24.02 billion. This basically means that as a proportion the fake notes identified between April 2016 to March 2017 stands close to 0 per cent of the demonetised notes.

The total number of Rs 500 and Rs 1,000 fake notes detected between April 2015 and March 2016, stood at 4,04,794. And this happened without any demonetisation. Hence, demonetisation has failed on its two major objectives.

The funny thing is that there were no estimates of how much of black money was held in the form of cash. The government admitted to the same as well, after having made the decision to demonetise. The finance minister Arun Jaitley said so in a written reply to a question in the Lok Sabha (one of the Houses of the Indian Parliament) on December 16, 2016, where he said: “There is no official estimation of the amount of black money either before or after the Government’s decision of 8th November 2016 declaring that bank notes of denominations of the existing series of the value of five hundred rupees and one thousand rupees shall cease to be legal tender with effect from 9th November 2016.”

The search and seize operations carried out by the Income Tax Department (popularly referred to as Income Tax raids) suggested that people tend to hold around 5 per cent of their black money in the form of cash.

But even this lack of data in public, did not stop economists from coming up with their own set of numbers, trying to defend this decision of the Modi government. Leading this charge was Columbia University economist Jagdish Bhagwati (along with two co-authors), who in a column in the Mint newspaper on December 27, 2016,  wrote: “Suppose we accept the estimate that one-third of the approximately Rs15 trillion in demonetised notes is black money.” These economists did not bother to explain, what logic did they base their assumption on.

Demonetisation has badly hit India’s large cash economy. As per the Bharatiya Mazdoor Sangh (the labour wing of the Bharatiya Janata Party, which currently governs the country): “As many as 2.5 lakh units in unorganised sector were closed and the real estate sector was badly affected where a large number of workers got unemployed.”

Agriculture trade, a sector which largely operates on cash, has been badly impacted as well, with farmers not getting adequate compensation primarily for vegetables and pulses, they had grown. This has led to farmers protests across the country, which has in turn led to several state governments waiving off farm loans.

Over and above this, demonetisation caused a huge cash shortage with people having to spend many days standing in ATM lines trying to withdraw their own money. Many people even died in the process.

As far as the Modi government is concerned they are unlikely to admit that demonetisation was a big mistake and will continue to put a positive spin around it, as they have from November 2016. Things will not change on that front.

To conclude, no relatively healthy economy in the past, has carried out demonetistaion. As the latest Economic Survey of the government of India points out: “India’s demonetisation is unprecedented in international economic history, in that it combined secrecy and suddenness amidst normal economic and political conditions. All other sudden demonetisations have occurred in the context of hyperinflation, wars, political upheavals, or other extreme circumstances.”

And the real costs of this unprecedented event are only just starting to come out.

A slightly shorter version of this column appeared on


The DeMon is in the details


The Narendra Modi government has unleashed a whole host of numbers on us, the citizens of this country, to prove how demonetisation has led to a huge increase in the number of returns filed. Different numbers have been offered by the prime minister, the finance minister, the finance ministry and the chief economic adviser to the finance ministry. Recently, there was even a clarification put out by the finance ministry regarding how to read these numbers.

This piece is not about how to read the different numbers put out by the government. For that you can read this excellent piece by James Wilson. I try and answer a different question here: Has this increase in the number of tax returns being filed ultimately led to a substantial difference in the total amount of direct taxes being collected by the central government as a proportion of the size of the Indian economy?

If it hasn’t, then the increase in the total number of returns being filed has basically meant more work and more money for the chartered accountants, and nothing else.

So, let’s take a look at Figure 1, which maps the direct taxes collected by the central government as a proportion of size of the Indian economy — that is, its gross domestic product or GDP. Direct taxes essentially consist of corporation tax, personal income tax, income tax paid by firms other than companies, security transaction tax, hotel receipts tax, etc. Corporation tax and personal income tax form a bulk of direct taxes.

The exercise has been carried out for the financial years between 2011-2012 and 2016-2017. This has been done because the GDP data is available only from 2011-2012 onwards. Also, while carrying out the calculations wealth tax has been ignored because it was abolished in the budget speech the finance minister Arun Jaitley gave on February 28, 2015. (To be honest, the collections were so small that even if they had been included, it wouldn’t have made any difference to the overall result.)

Figure 1:

(Source for Direct Taxes data: Source: Press Information Bureau, April 4, 2017. Source for GDP data: Reserve Bank of India)

Now what does Figure 1 tell us? There has been a slight improvement in the direct taxes to GDP ratio between 2015-2016 and 2016-2017. But at 5.58 per cent of the GDP, it is still trying to play catch up with the earlier years.

Also, it is worth reminding the readers here that in 2016-2017, the government got a declaration of  Rs 65,250 crore through the Income Declaration Scheme, a voluntary income disclosure scheme. If we adjust for the taxes collected under this scheme, the direct taxes to GDP ratio falls to 5.48 per cent. This scheme was launched before demonetisation happened. This changes things. And this is how the real scenario looks like (See Figure 2).

Figure 2:

What Figure 2 tells us is that demonetisation basically led to a slowdown in the economy where lesser tax was paid than in the past. The direct taxes to GDP ratio of 5.63 per cent was achieved in 2013-2014 without demonetisation.

Also, how do things look if we ignore corporation tax (i.e. corporate income tax) and look at the remaining direct taxes. This primarily comprises of personal income tax. Let’s take a look at Figure 3, which plots the ratio of direct taxes other than corporation tax as a proportion of the GDP.

Figure 3:

(Source for Direct Taxes data: Source for GDP data: Reserve Bank of India)

Figure 3 tells us that the direct taxes other than corporation tax as a proportion of GDP has jumped by 23 basis points to 2.33 per cent in 2016-2017, in comparison to 2015-2016. One basis point is one hundredth of a percentage.

Again, the question to ask here is: Has this jump happened because of demonetisation? It has happened primarily because of the money collected as taxes and fines under the Income Disclosure Scheme. Once the tax collected under the Income Declaration Scheme is adjusted for, the ratio falls to 2.23 per cent of the GDP. And this is how Figure 3 now looks like (See Figure 4).

Figure 4:

How do things look if we were to simply look at the corporation tax to GDP ratio? Take a look at Figure 5.

Figure 5:

As can be seen from Figure 5, the corporation tax to GDP ratio has been falling for a while, and it continued to fall in 2016-2017 as well.

All this analysis was for 2016-2017. How do things look in the current financial year i.e. 2017-2018? We do not have the GDP data for that, so calculating the direct taxes to GDP ratio is not possible. Nevertheless, there are other ways to analyse this issue.

A press release put out by the ministry of finance on August 9, 2017, states the following:

The Direct Tax collections up to July,2017 [i.e. between April 2017 and July 2017] in the Current Financial Year 2017-18 continue to register steady growth. Direct Tax collection during the said period, net of refunds, stands at Rs. 1.90 lakh crore which is 19.1% higher than the net collections for the corresponding period of last year.

Basically, direct tax collections have grown by 19.1 per cent during the first four months of this financial year in comparison to the same period in the last financial year. Hence, has demonetisation led to an increase in collection of direct taxes?

A press release put out by the ministry of finance on August 9, 2016, had this to say:

The figures for direct tax collections up to July, 2016 show that net revenue collections are at Rs.1.59 lakh crore which is 24.01% more than the net collections for the corresponding period last year.

Hence, in the period between April to July 2016, the direct tax collections had grown by 24 per cent, without the demonetisation of currency which was carried out in November 2016. What this tells us is that direct tax collections grew faster before demonetisation than they are growing after demonetisation.

Personal income tax collections have grown by 15.7 per cent during the first four months of this financial year. They had grown by 46.6 per cent during the first four months of the previous financial year.

So the point is that as far as the actual direct tax collections are concerned, demonetisation has clearly had a negative impact. This also explains why the government media releases tend to focus on the number of returns filed and not the tax that is being collected. More returns being filed without any increase in taxes collected simply means more work and more money for chartered accountants — and nothing else.

One argument that can be made here is that as the income earned by those who are filing returns now (but not paying taxes) goes up, they will pay taxes as well. But this argument rests on the assumption that the minimum taxable limit to pay income tax will continue to remain where it is and will not be increased in the years to come. If one looks at the history of income tax, this has clearly not been the case. The minimum taxable limit keeps going up every few years and at a rate faster than the growth in per capita income.

Of course, given that we live in an era of post-truth, all this data and analysis doesn’t really matter. What matters is who is presenting the data, even if it is incomplete and leads to wrong inferences being made. As Evan Davis writes in Post Truth—Why We Have Reached Peak Bullshit and What We Can Do About It:

[The] argument that who you are matters more than the substantive point you are making is especially true about politicians. Voters focus on character rather than policy partly because they are better able to judge character and are relatively uninformed on policy… So, for a politician, having a good reputation is worth a hundred quick victories in specific arguments.

The moral of the story is that it doesn’t matter if the right data is not being presented, because people will believe what is being presented.

The column originally appeared on on August 24, 2017.

Post Demonetisation Real Estate Sales Have Collapsed, But Prices Haven’t


It has been a while since I wrote anything on real estate and the only reason for it is the sheer lack of data on the sector.

Recently, the real estate consulting firm PropEquity released some interesting data and that gave me sufficient reason to write one more piece on real estate.

As per the data, f or the period between January and May 2017, the housing sales fell by 41 per cent to 1.1 lakhs, across 42 major cities. During the same period in 2016, the housing sales had stood at 1.87 lakh.

The interesting thing is that the launch of new homes has also come down considerably. For the first five months of the current year, which are under consideration here, the launch of new homes fell by 62 per cent to 70,450 units. During the same period in 2016, the launch of new homes had stood at around 1.86 lakh.

The new home launches are a good indicator of the appetite investors have for real estate. And that has clearly come down big time. So, what is happening here? One, people are not buying ready to move in homes from builders. And two, they aren’t interested in under-construction property, where investment returns tend to be very high, either.

Why has that been the case? Typically, a significant portion in any real estate deal tends to be carried out in black. When going about a real estate deal, a significant part of the transaction is in the form of cash which changes hands, and for which there is no record. This cash may be black money where no taxes have been paid. Or it could even be white money, where taxes have been paid, but which is now becoming black.

For most of the period January to May 2017, there wasn’t enough sufficient cash going around in the financial system. This was because of the demonetisation announced on November 8, 2016, by the prime minister Narendra Modi.

Take a look at Figure 1. It plots the gap between the currency under circulation as on November 4, 2016 (a few days before demonetisation) and at the end every week between January and May 2017.

Figure 1:

What does Figure 1 tell us? On January 6, 2017, the currency in circulation was around 50 per cent of the currency in circulation as on November 4, 2016. This meant that the gap was also around 50 per cent. Since then, the currency in circulation has kept increasing every week, as the RBI has printed and pumped money into the financial system, and this has led to the gap coming down. Hence, as on May 26, 2017, the currency in circulation was at around 83 per cent of the currency in circulation as on November 4, 2016. Given this, the gap had come down to around 17 per cent.

So, what does this tell us? It tells us that there wasn’t enough cash going around in the financial system for people to carry out transactions in cash. Given this, people were not in a position to pay the black part of any real estate transaction in cash. This essentially meant that real estate transactions collapsed and were down by 41 per cent during the first five months of the year.

It also tells us that many of those who wanted to sell real estate just sat on it, instead of carrying out the transaction in 100 per cent white amount, as was the hope post demonetisation.

By the end of March 2017, the financial system had nearly 75 per cent of the currency in circulation as on November 4, 2016. The point being that there was enough money to go back to making black payments as a part of real estate transactions. But that doesn’t seem to have happened, with new home launches down by a whopping 62 per cent during the period.

One answer for that might lie in a change that finance minister Arun Jaitley made in this year’s budget. Up until last year, home loans taken to finance self-occupied homes, were allowed a deduction of up to Rs 2 lakh for the interest paid on the home loan against taxable income.

For home loans taken to finance non-self-occupied homes, any amount of interest on the home loan could be deducted to arrive at taxable income. This was allowed as long as the real rent (if the home was rented out) or the notional rent(if the home wasn’t rented out, but the rent the home owner was likely to earn if he would rent it out), was adjusted against it.

Typically, given the high home prices, the interest paid on a home loan these days, is many times the rent a home is likely to earn, if rented out. This essentially ensures that by buying a second home, individuals could create a massive tax deduction and bring down their taxable income dramatically. The corporate crowd used this anomaly with great success by buying second and third homes, as they went up the hierarchy. And after buying these homes, they kept it locked, thus creating a shortage for homes available for rent.

In his budget speech, the finance minister Arun Jaitley limited all such deductions (for self occupied as well as other homes financed through home loans) to Rs 2 lakh. This has basically ensured that the market for homes to be create a tax deduction has now effectively come to an end.

This is another factor which has basically ensured that the demand for finished homes as well as under-construction property has come down dramatically during the first five months of this year.

Regular readers would know that I have been recommending this for a few years now. In an era of exceptionally high home prices, why should the government be encouraging people to buy homes in order to benefit from a massive tax deduction. Also, those who buy more than one home, aren’t exactly poor. Hence, why pander them like this? So, finally after many years this anomaly has thankfully been done away with.

This brings us to the last and the most important point of the piece. While, the sales and prospective sales of real estate have come down dramatically, what has the impact been on the prices front?

The National Housing Bank relaunched its real estate index RESIDEX yesterday. As per the press release: “NHB RESIDEX for January-March,2017 revealed that price indices for residential properties based on actual market prices for ongoing construction prices have increased over the previous quarter in 24 of the 47 cities covered in the Index including in Jaipur, Chennai, Lucknow, Guwahati, Howrah, Hyderabad, Bidhannagar etc. In Delhi, Faridabad, Chandigarh, Patna and Nashik etc, prices have come down.”

What this tells us is that the broader trend in prices across India hasn’t gone anywhere post demonetisation. On the whole prices haven’t changed much What does this tell us? It tells us that builders have great staying power. The amount of money that they have made and stashed away in the real estate bull run between 2002 and 2011, allows them a tremendous staying power.

Also, many real estate companies are fronts for politicians and there is no point for them in annoying politicians by cutting prices and selling homes. Instead of selling homes at lower prices, the builders would rather sit on it, and which is what they are doing.

The trouble with this is that the longer they do this, the longer the time correction of prices will last i.e. the prices may not go down in nominal terms, but if we take inflation into account over the years, they would have gone down substantially.

The thing is that this time correction is not enough. If the real estate market has to revive, actual real estate prices need to fall. Yeah, I know I have been repeating this like a cuckoo clock over the years, but that is the only way out of the mess that prevails.

Postscript: In the next edition of the Vivek Kaul Letter, I will be discussing the newly launched NHB RESIDEX index in detail. For the first time, there is some detailed price data that has been made available across multiple cities. And that should make for an interesting piece of analysis and reading. Do keep a lookout.

The column originally appeared on Equitymaster on July 11, 2017.


How I Knew Demonetisation Was Going To Be A Disaster Right From Day 2


The recent past has seen even the biggest supporters of prime minister Narendra Modi concede that demonetisation was a disaster that the country could have done without. A major reason for this has been the gross domestic product (GDP) data for the year 2016-2017, which was published on May 31, 2017.

As per this data, the growth for the non-government part of the economy crashed to 5.6 per cent in 2016-2017, after having grown by 8.5 per cent in 2015-2016. In fact, even the 5.6 per cent growth might be an overstatement given that the GDP data does not capture informal sector data well enough. And the informal sector has been in a large mess post demonetisation.

The trouble is that anyone who had any basic understanding of economics or had read up on some economic history, would have known this from day one. And if not from day one, at least from day two.

I wrote my first piece on demonetisation within hours of the announcement to demonetise the Rs 500 and Rs 1,000 notes. As a freelance writer, I am expected to react to things as soon as they happen. The first piece I wrote had a neutral tone to it, where I tried to explain as to why the government had done what it had done.

With the benefit of hindsight, I can say that the first piece was written too quickly and at the same time was highly influenced by the government’s press release explaining the decision. But from Day 2 onwards, I went back to basic economics to essentially say that demonetisation would turn out to be bad for the Indian economy as it eventually has.

After the first piece was published I happened to remember a story that was a part of my first book Easy Money–Evolution of Money from Robinson Crusoe to the First World War.
The story was about cigarettes being used as money in the prisoner-of-war camps that cropped up all over Europe during the Second World War. The prisoners used to receive standard food parcels from the Red Cross during the war. The parcels included biscuits, butter, cigarettes, canned beef, chocolate, jam, milk, sugar, etc.[i]

As soon as the rations arrived, prisoners used to start exchanging them. One of the earliest transactions used to be nonsmokers exchanging their cigarettes for chocolates that the smokers had got. Sikhs, who had been fighting for the British Army, used to exchange their allocation of beef for other goods like butter, jam, and margarine. But gradually cigarettes went way beyond the status of a normal commodity and became the standardized medium of exchange. A prisoner of war even recalls exchanges like “cheese for seven cigarettes” happening in the camps. He also recalls an individual who sold coffee, tea, or hot chocolate at the rate of two cigarettes a cup. This individual eventually scaled up his business but failed, making losses of a few hundred cigarettes.[ii]

Sometimes, the weekly Red Cross parcels which had cigarettes in them, did not arrive. At other times, the stress of heavy air raids near the camps made peo­ple smoke away their money, that is, cigarettes.[iii]

In such situations, there was not enough money (i.e., cigarettes) going around in the prison economy and led to a situation where prices fell. Since people did not have cigarettes to buy goods, those who were hoarding food, toiletries, and so on, had to cut prices in the hope that they are able to make a sale.

This story tells us a lot about how demonetisation has played out.

Money basically has three functions. It is a medium of exchange, a unit of account and a store of value. It’s function as a medium of exchange is its most important function. People use money to buy and sell things i.e. to carry out economic transactions, with the buyer paying money to the seller every time he sells a product or a service.

In the above example cigarettes were used as money. And when a war camp ran out of cigarettes, or there was a shortage, the economy inside the camp collapsed or slowed down considerably.

How is this relevant to demonetisation? Any economy needs a certain amount of money to function properly. Demonetisation at one go rendered 86.4 per cent of the currency useless. While currency is not the only form of money in India, it is the major form.
Like with cigarettes at prisoner-of-war camps, suddenly there wasn’t enough currency going around post demonetisation. Hence, the rupee’s function as a medium of exchange came to a standstill.

The Reserve Bank of India (RBI) has replaced this money at a very gradual pace. In fact, even now the currency in circulation is at 84 per cent of the currency in circulation that prevailed before demonetisation. This shortage of currency over the last seven months has led to a slowdown in the buying and selling of things i.e. people haven’t been able to carry out economic transactions.

The slowdown in economic transactions has ultimately led to a slowdown in economic growth. In fact, when there weren’t enough cigarettes going around, prices collapsed in the prison economy. Along, similar lines prices of agriculture produce, have collapsed since demonetisation, as cash in agriculture trade has dried up. This has led to the farmers protesting across the length and breadth of the country.

Anyone who had studied some economic history would have known from the beginning that demonetisation would turn out to be a disaster that it has. Anyone who understood the functions of money, would have argued along similar lines.

But that is not how it has turned out to be. Economists have gone on and on, about how demonetisation will prove beneficial to the nation, especially in the long run. Some have even built models to show the success of demonetisation.

But the fact of the matter is that you can keep building models to justify demonetisation but that doesn’t change the basic fact that with less money going around an economy contracts or grows at a slower pace.

Because with less money people cannot carry out economic transactions of buying and selling things. And without that economy grows slower or contracts.

Yes people can move onto digital payments. But digital payments haven’t grown fast enough to be able to bring down the influence of cash in the Indian economy. This means people still prefer cash or they are simply not confident about spending money in any form at this point of time.

[i]  C. Desan. Coins Reconsidered: The Political Alchemy of Commodity Money (The Berkeley Electronic Press, 2010).

[ii] R.A. Radford, “The Economic Organisation of a P.O.W. Camp,Economica 12 (1945): 189–201.

[iii]  Desan 2010

The column originally appeared in the Huffington Post on June 17, 2017.

Digital Transactions Were Growing Faster Before Demonetisation

The finance minister Arun Jaitley recently said: “Through demonetisation, the government created a new normal, with a big step in removing the earlier scenario of cash economy and shadow economy.”

If this is true then there should have been a substantial jump in digital transactions in the recent past. If people are not carrying transactions in the cash economy, then they should be carrying out transactions digitally. But is that true?

Let’s first look at the number of digital transactions (i.e. volume of digital transactions) that have happened every month between November 2016, when the demonetisation of Rs 500 and Rs 1,000 notes was announced, and May 2017, the latest monthly data available. All the digital data used in the column deducts the transactions carried out through Real Time Gross Settlement system simply because it is not a retail mode of digital transactions, which is primarily what we are looking at here. The minimum amount that can be transferred through this mode is Rs 2 lakh.

Take a look at Figure 1. This basically plots the total number of digital transactions that have happened between November 2016 and May 2017.

Figure 1: 

As is clear from Figure 1, the volume of digital transactions peaked in December 2016, when the impact of demonetisation was at its peak. With very little currency available to carry out transactions, people had no option but to use digital modes of settling transactions. In May 2017, the total number of digital transactions was down by 11.4 per cent in comparison to December 2017. This clearly tells us that fewer people are using digital modes of transactions in comparison to the period right after demonetisation.

Now take a look at Figure 2. In this we look at the total value of digital transactions carried out every month between November 2016 and May 2017.

Figure 2: 

From Figure 2, it is clear that the total value of digital transactions peaked in March 2017, and has fallen by 20.2 per cent since then. Past data shows that the digital transactions tend to increase in the last month of the financial year as people settle their dues and pay their taxes. Having said that, the total value of digital transactions in May 2017, was higher than that in December 2016. But with volume of transactions being lower, what this means that people who were already on the digital bandwagon are spending more digitally. And that is one piece of good news for a government looking to increase the proportion of digital transactions in the overall economy.

This comparison just tells us how things have evolved on the digital front after demonetisation. How do things look, if were to stretch the timeline a little more? Let’s compare May 2017 data with May 2016 data (In this case I have ignored the data for United Payments Interface and Unstructured Supplementary Service Data (USSD). I could not find this data for May 2016 and May 2015. This will not have any impact on the overall result because the USSD form of digital payment is close to zero and can be effectively ignored.

When it comes to UPI even in May 2017 with all the push and promotion by the government, it made up for 1.1 per cent of the total digital transactions by volume and 0.1 per cent by value (of course we have ignored RTGS here).

Take a look at Table 1. It has the total digital transactions both by volume and value, over the years.

Table 1:

Digital transactionsMay 2017May 2016May 2015
Volume (in millions)831.5726.3491.2
Value (in Rs billion)20,901.515,364.612,173.9

Source: Author calculations on Reserve Bank of India data 

What does Table 1 tell us? Between May 2016 and May 2017, the total number of digital transactions (i.e. volume) went up by 14.5 per cent. In value terms, the digital transactions jumped by 36 per cent. So, doesn’t this tell us that demonetisation had a positive impact on the digital transactions? Before we jump to that conclusion, let’s look at how the situation was between May 2016 and May 2015, when there was no demonetisation to contend with.

Between May 2015 and May 2016, the total number of digital transactions grew by 47.9 per cent in volume terms, which was significantly faster than the increase between May 2016 and May 2017. Of course, the low-base effect is at work, but even with that the jump in percentage terms was significantly more last year.

This also tells us clearly the negative effect that demonetisation has had on the overall economy, with the larger section of the economy going slow on spending. This ultimately reflects in the slower jump in digital transactions.

How do things look in terms of value? In terms of value, the jump between May 2015 and May 2016 stood at 26.2 per cent, which is lower than the jump between May 2016 and May 2017. (I did not look into data from May 2014 and before, because the structure of the digital data changes dramatically, with the importance of ECS increasing in comparison to NACH today).

What does this tell us? It tells us that demonetisation has led to those who were already on the digital mode to spend more digitally. It also tells us that the better-off haven’t been impacted much by demonetisation. Nevertheless, the main aim of demonetisation was to increase the total number of digital transactions (the dream of a cashless society i.e.), which was happening anyway and seems to have slowed down after demonetisation.

The fact that digital transactions in India were growing at fast pace even before demonetisation, isn’t surprising given that India is one of the youngest nations in the world. More than 54 per cent of India’s population is under 25 years of age. Youth take on to new technology faster than others. Hence, the digital transactions in India will continue to grow in the years to come, as they had before demonetisation.

This brings us back to the question was demonetisation necessary? The useful idiots of Narendra Modi (with due apologies to Thomas Sowell who coined the term for a different context) through their WhatsApp forwards and analysis in the media, would like us to believe that. But as more and more data comes out, it is becoming more and more clear that demonetisation was a more or less whimsical decision carried out without any due-diligence. Of course, it needs to be defended now.

The column originally appeared on Equitymaster on June 12, 2017.