Category Archives: demonetisation, economy, poverty, politics

The poor bore the costs of achieving demonetisation’s purported objectives: Was it worth it?

It has been a war of words since the release of the Reserve Bank of India’s annual report 2017-18, which stated that 99.3% of the demonetised currency was returned. While critics of the government’s note ban move have felt vindicated, the Finance Minister has defended demonetisation by claiming that it has fulfilled its ‘larger objective’ of making India a tax compliant society. It is worth remembering that the government’s narrative around the objectives of demonetisation has been changing over time. It started with the Prime Minister’s dramatic note ban announcement on 8th November 2018, which was widely termed as a ‘surgical strike’ on black money. Then it changed to a narrative of cashlessness and digitalisation and finally, the current justification of tax compliance.

At each step, there has been an emphasis on morality, and the message sent out by the government and amplified by the press and social media has been clear: those who comply are ‘good citizens’ and others are enemies of India. Given the credibility and popularity that PM Modi enjoyed in 2016 – and given that he was the face of demonetisation – this kind of messaging created real pressures on people to comply with the government’s efforts.

For a large number of poor households in India, however, compliance came at high costs. It wasn’t just the snaking lines to deposit cash at the bank, or the ruptures in cash-dependent supply chains that took away jobs and made food prices soar. For a population that earned barely enough to subsist, digitalisation and tax compliance were objectives that had little resonance with their daily lives. The tax base in India is very small, and income inequality is a glaring reality. Data from the India Human Development Survey II (2011-12) shows us that 90.4% Indian households earn less than Rs 250,000 per year, which means that individuals in these households earn too little to be liable to pay income tax. The situation is only slightly better in cities, with 73.8% households in metro cities and 84.2% in non-metro cities remaining out of the tax ambit because they earn too little (the five years between this survey and demonetisation is unlikely to have much altered this situation). This essentially means that the poor – most of them marginal farmers, agricultural labour and non-farm casual workers – who do not pay taxes anyway, took the hardest hit post-demonetisation in order to facilitate increased direct tax collection to the tune of 18% in FY 17-18. There is no argument about the benefits of increased tax collection, but does the end always justify the means?

Many have wondered why so much suffering did not provoke backlash against the government. One answer lies in the government’s strategic use of nationalistic narratives in which the role of the good citizen is constantly invoked. In our fieldwork in urban neighbourhoods across Delhi NCR, we observe that people recalibrated their responses to fit in with the idea of the good citizen. For example, in the immediate aftermath of demonetisation, the poor saw themselves as hardworking, ordinary citizens who suffered due to the corruption of other, richer people. At the same time, a petty landlord in an urban village in East Delhi told us he was ambivalent about collecting rent by cheque instead of cash and wondered if the government was going to come after people like him even as he defiantly told us he filed his tax returns annually. The moral narrative also created fissures within communities, encouraging those with a foothold in the formal economy to pass judgement on poorer households who were unable to cope without cash. As late as June 2017, we met a Dalit tailor in Gurgaon who invoked demonetisation to explain why he had paid money he could ill afford to a tout in order to get a PAN card made and file taxes.

Fig 1: An overwhelming proportion of households in India, rural and urban, earn too little to pay income tax (Source: IHDS II (2011-12); Graph credit: Shamindra Nath Roy)

Fig 2: Primary bread earners in these poor households are mostly farmers and farm-based labour, non-farm casual workers and entrepreneurs in the unorganised sector. These occupations were the most impacted by the cash shortage post demonetisation. (Source: IHDS II (2011-12); Graph credit: Shamindra Nath Roy)

These are but glimpses of the kind of disruptions that demonetisation caused, adding fuel to fires that had already been set by rising inequality and the inability of the Indian democratic project to fulfil the dreams of a growing number of semi-educated but aspirational young people. Instead of arguing about the success or failure of demonetisation, it might be a good time to put our ears to the ground and re-examine the experience of poverty in India. We must take heed and try to understand the ways in which the poor seek to be included in the larger public discourse, often to their own detriment, and the ways in which they continue to remain voiceless and often vilified.

The original piece was published on the website of the Centre for Policy Research:

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