Indian Finance Minister Arun Jaitley. Photo: AFP
Indian Finance Minister Arun Jaitley. Photo: AFP

Exactly two years after the Indian government demonetized high-value currency notes, Finance Minister Arun Jaitley said in a blog post on Thursday that the controversial move was done to formalize the economy, as well as increase digital transactions and widen the tax base.

However, when Prime Minister Narendra Modi announced the move on November 8, 2016, he said the main purpose of demonetization was to “strengthen the hands of the common man in the fight against corruption, black money and fake currency.”

Modi also said the move would be a blow to the funding of terrorist activity because high-value currency hoarded by anti-national or antisocial elements would become “worthless pieces of paper.”

The government hoped that people hoarding unaccounted cash would not dare to deposit demonetized currency in banks in exchange for new notes. However, a Reserve Bank of India report released in August said more than 99% of the demonetized notes were returned to the banks.

Big jump in tax collections

In regard to this, Jaitley said, “Confiscation of currency was not an objective,” but “getting it into the formal economy and making the holders pay tax was the broader objective. The system needed to be shaken in order to make India move from cash to digital transactions.”

The minister said: “Demonetization compelled holders of cash to deposit the same in the banks.” This resulted in identifying 1.74 million suspected account holders “from whom the response has been received online through a non-invasive method. The violators faced punitive actions.”

Jaitley noted that demonetization boosted income-tax collection, as “collections were higher in financial year 2018-19 (till 31-10-2018) compared [with] the previous year by 20.2%. Even in the corporate tax, the collections are 19.5% higher from two years prior to demonetization.”

He said digital transactions had been boosted after demonetization. “The Unified Payment Interface (UPI) was launched in 2016 involving real-time payments between two sets of mobile holders. Its transactions have grown from 500 billion rupees in October 2016 to 598 billion rupees in September 2018.” The indigenously built Bharat Interface for Money (BHIM) for quick-payment transactions using UPI was now being used by 12.5 million people, he added.

Jaitley claimed that Visa and MasterCard were losing market share in India to the indigenously developed payment system of UPI and RUPAY Card, “whose share has reached 65% of the payments done through debit and credit cards.”

The minister said demonetization and implementation of the goods and services tax (GST) curbed cash transactions in a big way. “This formalization of the economy has led to an increase of the taxpayer base from 6.4 million in the pre-GST regime to 12 million taxpayers in the post-GST regime,” he said.

However, opposition parties have said demonetization was a “disaster” and the Congress party has called for a nationwide protest on Friday.

Former prime minister Dr Manmohan Singh claimed demonetization adversely impacted every single person in the country, regardless of age, gender, religion, occupation or creed.