Demonetization: A Mid term Analysis


The recent annual report of Reserve Bank of India (RBI) has again stirred the public debate on the impact of demonetization on the economic health of the country. The report categorically states that 15.28 lakh crore, or 99 per cent of the Rs.15.44-lakh-crore scrapped currency notes, had come back to the central bank between the government’s demonetisation decision and June 30, 2017.

In the wake of this report let’s review and assess the demonetisation drive which started with announcement by the Prime MInister Narendra Modi on 8th of November 2016 that high-value currency notes of Rs 500 and Rs 1,000 would cease to be public tender hence forth.  The motives stated for conducting such a large scale drive were to stem the circulation of black money and counterfiet currency, and to choke terror funding and corruption. With one stroke, 86.5% of currency in circulation in the economy ceased to exist as legal tender.

A Mid-term Assessment:
  • As far as black money is concerned, demonetisation did not hit on flow or generation of black money, it was only the stock of the black money which was targeted. Finance Minister Arun Jailtley stated that government was expecting around 20% of ceased currency in circulation(CIC) amounting approximately 3 lakh crores,  not to come back to the system. However, the government’s expectations of windfall gains are wiped away by central bank’s annual report which disclosed that 99% of the currency is back in the system. More importantly the report states that the notes deposited in Nepal and District Co-oprative Banks have not been counted yet and hence not the part of current disclosures. The inclusion of these notes can take the possibility of more than 100% of the CIC  coming back to the system which could be a major cause of embarrassment to the government.
  •  As far as counterfeit currency is concerned media reports stated that Rs. 2000 notes were already available as counterfeit currency just within a week of demonetization.
  • The process of demonetisation to curb corruption was also self defeating in nature because of the introduction of  Rs.2000 notes made easier to carry on the currupt practices.
Now, without going into nobility of intentions, apparently it can be factually stated that the execution of the whole exercise was poorly planned. Let’s forget about its effects, the way it was executed exposed the ill-preparedness of the government to handle the challenge. For days and months, the whole nation was standing in endless queues. Government, central bank and financial institutions kept tweaking the process and issued new notifications every day.
  • 104 people have lost their lives either standing in queues or by committing suicide due to demonetisation. None of them was either a terrorist or a black money hoarder.
Who is responsible for these deaths?
  • 1.5 million people lost their jobs in demonetisation period. There was literally mass exodus of workers to their homeland because of job-losses. Small and Medium Sector Enterprises which are largely dependent on cash shut down in thousands due absence of any cash and workers.
  • According to latest GDP data released, a literal slump of 2.2% is recorded in GDP growth rate, as Q1 GDP of the financial year 2017-18 is pegged at 5.7% than 7.9% a year earlier during the same period.
  • Later, the government started to sell the idea that primarily the whole thing was about achieving a less cash economy, and hence it was pushing for the agenda of digital india. However, to get the facts correct the value of digital transactions nationwide declined marginally (1.5%) to Rs 92.6 lakh crore in February 2017 from Rs 94 lakh crore in November 2016 according to representative data (provisional) on electronic payments released by the Reserve Bank of India (RBI).
Now after the revelation of RBI report ,the government, taking a complete U-turn, states that the motive for demonetisation was not confiscation of money but it was called for widening the tax-base, formalisation of the economy, to give a digital push to economic transactions, spreading awareness against black money and corruption using shock and awe therapy and so & so on. True that to a certain extent, these objectives met some success and which are good for our economy but the cost we have paid to achieve these is really huge. Further, availability of plethora of other options to attend these objectives makes this hugely costing exercise futile and meaningless.
Therefore, none of the projected targets is backed up by any concrete empirical evidence. Conclusively, it can be said that howsoever good the intentions could have been for conducting demonetisation drive, the paid economic price has come out to be really huge as compared to little gains. We don’t know about the so called long terms gains yet but a mid-term analysis based on available data is confident enough to suggest that it was a gimmick played out of political temptations.
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