Long lines and a frantic atmosphere. Some troubled faces outside banks and ATMs, and a sense of pride on their faces. It was a day when media outlets around the world had to decide which region of India to report from rather than searching for news. We’re talking about the days following November 8, 2016, when India went through the demonetization process. Although there have been many occasions in our country’s history when any government action has had a massive impact, the case of demonetization was different.
Following 2014, the country took a fresh look at issues such as corruption and black money, and demonetization was viewed as an effective weapon against them. While some people viewed the difficulties encountered during this process as necessary for the country’s progress, others viewed it as a political stunt undertaken without regard for necessity. This was a common practice among opposition parties following the demonetization, but it came as a surprise when financial experts were also seen divided on this move.
It is true that there is no single cure for major issues such as black money and corruption, and it is also true that even with noble intentions, complete success in such large battles becomes extremely difficult. But was demonetization the best way to address these issues? Were there any alternatives to taking this entire step, and were we able to achieve the goal for which the entire country went through a financial crisis? Even after six years, the success or failure of demonetization remains a major point of contention. So, through this article, we will learn what demonetization is, how it is carried out, what were the objectives behind it and what are its benefits and drawbacks. But most importantly, we will try to figure out what we can learn about India’s people and leadership from this exercise.
So, firstly let us try to understand what demonetization means. Demonetization is a legal process that devalues certain currency units and reduces their value to zero. It’s worth noting that the Central government led by Narendra Modi is not the first to do so in India. In India, demonetization has a long history. Under British rule, currency notes with denominations of 1000 and above were demonetized for the first time in 1946. Prior to that, notes of up to Rs 10000 were in circulation. 1000, 5000, and Rs 10000 notes were reintroduced in 1954, only to be demonetized again by the Morarji Desai government in 1978. Finally, Rs 1000 notes were reintroduced in November 2000, and they lasted until the recent demonetization. As a result, Prime Minister Modi declared on the evening of November 8, 2016, that all 500 and 1000-rupee notes will be invalid as of midnight on the same day. This incident was almost a recap of what happened in 1978. The purpose of the exercise was stated to be the elimination of black money and counterfeit notes. So, it is natural to wonder, if the same work has been done twice before with the same goal, what was different in the 2016 Demonetization? The distinction was slight but significant.
During Morarji Desai’s government, most Indians were not part of the banking system and did not have high-denomination notes. Only 15-20% of the cash in circulation was used. But things were different in 2016 when the economy had matured, and majority of cash was only available in high denomination notes of Rs 500 and Rs 1000. This time, approximately 86% of the money in circulation had to be returned. The government gave a time frame of two months to the public to deposit the notes. Amount up to 10 lakhs could be deposited in each individual’s account without the source being disclosed, and those who did not have a bank account could deposit money in another person’s account with his written consent.
If such a high-stakes, politically risky, and difficult-to-implement strategy is proposed, the question is why? What advantages were anticipated from demonetization? The primary goal of demonetization, according to the government, was to combat black money. The NDA government came to power in 2014 with the promise of eradicating corruption, and demonetization was seen as the most effective tool. However, many more secondary goals were anticipated from this exercise. It was expected that when the cash was returned, the counterfeit currency would be eliminated due to bank scrutiny. In addition, less cash and circulation were expected to have a direct benefit in the form of inflation control; less cash means less demand for goods and services, which means lower prices. Aside from that, because all currency was to be deposited in banks only through the formal system, cash formalization was expected.
Basically, all cash would have been accounted for, and through these records, the correct income of the people could be estimated, allowing the tax base to be expanded. This move was also expected to encourage the use of digital payments. One of the goals, according to experts, was to improve the security of banknotes. Making the notes more durable and adding extra security features could raise the cost of the counterfeiting process and it was also expected that because of the low cost of bank deposits, financial institutions would be able to offer low-interest loans, which would benefit overall economic growth. But the greatest hope was that the haphazardly collected black money would set a new example of social justice by being distributed to the poor and needy.
Gandhiji claimed during the non-cooperation movement that if all Indians stopped supporting the British government, Swaraj would be achieved in a matter of months. Unfortunately, not everything is as it appears. The same thing happened during demonetization. The majority of the demonetized cash in circulation was formalized and reintroduced into the banking system. 99.3% of the money was returned within two years and a few months. The government anticipated that 20% of the banknotes, or approximately Rs 5 lakh crore, would not be deposited back.
However, according to a 2018 RBI report, banks had received Rs 15.30 lakh crore in demonetized notes out of a total of Rs 15.41 lakh crore. According to 2022 data, the currency in circulation after demonetization was Rs 31.05 lakh crore, up from Rs 16.4 lakh crore in 2016. The number of currency notes also increased, which meant that, in addition to lowering inflation, the dream of lowering the cost of printing notes was also dashed. People in positions of power and status devised numerous methods of evasion, against which the entire campaign was launched. These people exchanged their notes by hiring poor people or through employees such as their drivers, maids, or guards. These people were fully supported in their deception by some unscrupulous bankers who deposited money through back-door accounting. Furthermore, the cash collection boxes in the Worship Places that are exempt from tax department investigation became tools of money laundering for such people. The reason for speaking in this manner is that there was a sudden increase in donations of demonetized bank notes following demonetization. As a result, the anticipated benefits of demonetization were not realized, and the burden fell on ordinary taxpayers. So, let us examine this cost.
In addition to the cost of printing new notes, the dimensions of all the notes changed, necessitating the modification of each ATM’s cassette. Prior to demonetization, the RBI spent Rs 3421 crore in 2015-16 on printing banknotes, which increased to Rs 7965 crore in 2016-17 and Rs 4912 crore the following year. That translates to an additional cost of at least 5000 crores. As a result, the RBI’s dividend to the government decreased from Rs 65876 crores in 2015-16 to Rs 30,659 crores the following year and Rs 50000 crores the next year, i.e., 2017-18. Along with this, the Indian Air Force was paid Rs 29.41 crore for airlifting the banknotes.
In addition, there was a significant burden on the exchequer for the collection of old notes, storage, and movement of new notes across the country. This operation had an explicit cost, but the implicit cost was economic damage. The Purchasing Managers’ Index (PMI), which measures manufacturing and service growth, fell from 54.5 in October 2016 to 46.7 the following month. A PMI value greater than 50 indicates expansion, while one less than 50 indicates contraction. This was the most significant drop in PMI in three years.
During the same period, the growth of the industry’s eight core sectors fell from 6.6% to 4.9%. Demonetization also had a significant impact on the agriculture sector, as most transactions, from seeds to pesticides and fertilizers, are conducted in cash. Because of the risk of money laundering from above, the RBI has also prohibited deposits and withdrawals from cooperative banks, which are the backbone of agricultural lending. Overall GDP growth was 7.5% in September 2016, which came down to 5.7% in June 2017 following demonetization. Aside from that, job losses in various sectors have occurred as a result of demonetization. According to CMIE data, the number of employed people was 406.5 million between September and December 2016, but it was 405 million between January and April 2017, implying that at least 10.5 lakh people lost their jobs. The unorganized sector, as well as the real estate and construction sectors, suffered the most from demonetization.
According to the All-India Motor Transport Congress, the cash crunch affected approximately 8 lakh truck drivers and conductors, and approximately 4 lakh trucks were stranded on major highways across India. Long lines of these trucks could be seen on highways as toll booth operators refused to accept demonetized notes. Following that, the government was forced to suspend toll collection on all national highways until December 2. Just think about the loss of toll revenue during this time. Demonetization, RERA, and GST reforms all had an impact on real estate and construction, causing delays in new property launches. The supply of new housing units in India’s top six cities fell by 60% in the first three quarters of 2017 compared to the same period in 2016.
The orgy of demonetization on the stock markets wiped out investors’ wealth overnight. The BSE Sensex and NIFTY fell more than 6% the day after demonetization, but the most emotionally distressing aspect of demonetization was seen in the condition of the poor, who faced unprecedented hardships as a result of demonetization. Despite government orders, hospitals refused to accept old notes for health emergencies and surgeries. The daily wage workers had to leave the daily wage for several days due to long lines outside ATMs. In December 2018, then-Finance Minister Arun Jaitley stated in Parliament that demonetization had killed four people, including three bank employees and one SBI customer. While news reports about numerous people in the lines suffering from heart attacks and heart strokes persisted.
Many experts believe that demonetization was doomed to fail from the beginning as it is a conceptually flawed strategy. This is because its underlying assumption, that most black money is stored in cash, is incorrect. According to experts, the majority of black money is kept in foreign assets such as Swiss bank accounts or Shell companies. Many times, such black money is reinvested in the domestic economy in the form of Foreign Direct Investment, and since demonetization only affected domestic cash, most of the black money was unaffected. But, as our elders have always taught us if the intention is clear, hard work is never defeated; something similar happened with the Indian government during demonetization. Since there were numerous intentions, karma bore many fruits. We must remember that even though only 0.7% of the money was not returned, it was a significant amount.
Furthermore, because it is impossible to make a precise estimate of the amount of actual black money stored in cash, we cannot say how much black money was destroyed. In February 2019, then-Finance Minister Piyush Goyal told Parliament that his government had recovered Rs 1.3 lakh crore in black money through anti-corruption measures such as demonetization. Also, while black money may have been deposited in banks, it was definitely formalized during this process. All of the money was accounted for, and these records were also used for tax intelligence and targeted raids. The fact that the number of Income Tax returns filed increased from 43.3 million to 52.9 million following demonetization is direct evidence of this. Taking advantage of people’s fear of demonetization, the government devised the income disclosure scheme, under which some black money can be returned to the owner in the form of white money by declaring it.
Due to this also there was an increase in income tax collection. The elimination of counterfeit currency was another significant benefit of demonetization. Its elimination weakened the backbone of organized crime and terrorism particularly in J&K. The reduction in large-scale terror attacks in the valley was direct evidence of this. New security features such as micro letters and watermarks were also added to the new banknotes, as well as changes to their dimensions and design, making counterfeiting more difficult. However, by not making the notes polymer-based, the government passed up an opportunity to further improve their durability and security. Demonetization also provided the necessary impetus to India’s Digital Payment Revolution.
According to the World Bank’s Findex database, digital payments in India increased by up to 29% between 2014 and 2017. NEFT transactions increased from around Rs 7000 billion to Rs 12500 billion between January 2016 and August 2017, debit card transactions increased from Rs 2328 billion to Rs 2700 billion, and IMPS transactions that were not used prior to demonetization reached Rs 651 billion. Mobile wallets have largely replaced cash in regular payments. In this spear, where transactions totalled Rs 22.14 billion in January 2016, the value increased to Rs 83.53 billion in January 2017. And, in the midst of it all, we have all witnessed the expansion of UPI.
Despite a slowdown in new deliveries in the real estate and construction sectors, the benefit of low demand has been passed on to buyers and renters in the form of lower property rates. As a result, the property is very affordable, and the purchasing power of many people has a positive effect on overall aggregate demand. Also, the use of demonetized bank notes was permitted for the payment of municipal and local civic bodies’ taxes, which resulted in an increase in revenue collection for these bodies as well.
So, in this article, we conducted a comparative analysis of demonetization, in which we learnt about the process of demonetization, its objectives, and how successful these objectives were. We also believe that endless debates on the benefits and drawbacks of demonetization are possible, but this exercise revealed some very interesting aspects of Indian society. Demonetization caused large-scale riots and the fall of governments around the world, but in India, the common man demonstrated a spirit of patriotism and sacrifice despite facing insurmountable hardships, which is a source of great pride.
Simultaneously, demonetization demonstrated the Indian economy’s resilience. Despite the severity of the economic shock, everything from the financial market to economic growth and bank lending quickly recovered. According to political experts, an unprecedented political transformation occurred when, despite the difficulties of demonetization, the NDA government was given another opportunity to serve the people. We must remember that no single ‘Brahmastra’ can ever be sufficient for issues such as corruption, money laundering, and black money. These diseases can be gradually eradicated with a series of well-intentioned actions. In this context, we can call demonetization a well-intentioned step in all directions, but it could have been much better executed.
(Author is a student of Journalism and Media Studies at University of Jammu)