Demonetisation: Was It A Complete Failure? 

Five years back on November 8, Prime Minister Narendra Modi appeared on national television and said all Rs 500, Rs 1,000 high-value notes will turn invalid by midnight. The announcement at 8 pm— aimed at flushing out money hidden from the taxman, known as black money—led to nearly 86 percent of the currency in circulation becoming invalid by midnight, without providing for adequate replenishment. All economic agents were given a limited time window to deposit their existing notes with banks and replace those with new notes. This created huge pressure on the banking system. 

Quite naturally, utter confusion followed. The move, known as demonetisation, caused a lot of hardship for large swathes of people who were forced to form serpentine queues before banks to exchange notes. Several small businesses that were dependent on cash took hard knocks. The negative impact of demonetisation was felt across all segments of the economy, especially agriculture and industry. The worst impacted were segments that relied on high-volume cash transactions, such as organized and unorganized retail. The impact was felt both at the firm level as well as the consumer level. 

There were three main economic objectives of demonetisation—fighting black money, fake notes and creating a cashless economy by pushing digital transactions. Did demonetisation achieve those targets? 

Was Black Money Recovered? 

Eradicating black money was the prime target of demonetisation. Black money refers to cash that is not accounted for in the banking system or cash for which tax is not paid to the state.

But what has happened in reality? According to the RBI data, almost the entire chunk of money (more than 99 per cent) that was invalidated came to the banking system. Of the Rs 15.41 lakh crore worth invalidated notes, notes worth Rs 15.31 lakh crore have returned.

In February 2019, the then finance minister Piyush Goyal told Parliament that Rs 1.3 lakh crore black money has been recovered through all anti-black money measures including demonetisation. Remember, the government had originally expected that at least Rs 3-4 lakh crore black money will get extinguished outside the banking system due to demonetisation exercise alone. Thus, data suggest that demonetization was a failure in unearthing the black money in the system

Could Fake Notes be Eradicated?

Fake notes or counterfeit currency notes were the second big target of Modi’s demonetisation. In 2016, the year when demonetisation was launched, 6.32 lakh counterfeit pieces were seized across the country. In the next four years, a total of 18. 87 lakh pieces of fake notes have been seized across the country in various denominations, according to the RBI data. During 2019-20, out of the total Fake Indian Currency Notes (FICNs) detected in the banking sector, 4.6 percent were detected at the Reserve Bank and 95.4 percent by other banks.

Most numbers of fake currency notes seized in the post-demonetisation years were in the Rs 100 denominations-1.7 lakh pieces in 2019-20, 2.2 lakhs in 2018-19 and 2.4 lakh pieces in 2017-18. Compared to the previous year, there was an increase of 144.6 percent, 28.7 percent, 151.2 percent and 37.5 percent in counterfeit notes detected in the denominations of Rs 10, Rs 50, Rs 200 and Rs500 in Mahatma Gandhi New Series respectively- the RBI data shows. Counterfeit notes continue to be circulated even now.

Was a cashless economy created? 

Creating a cashless economy was pitched as another major target of demonetization in the later period. How successful was this? Cash has proved that it remains the King in the post-note-ban years. Currency in circulation, according to the RBI data, was Rs 24.2 lakh crore from Rs 16.4 lakh crore in 2016, as of March 2020. The volume of currency notes has increased to 11.6 lakh pieces in 2020 from 9 lakh pieces in 2016.

Certainly, digital payments have risen. According to this Financial Express report, UPI payment volume stood highest in FY20 at 1251.86 crores up from 91.52 crores in FY18 among all digital or contactless payment channels. UPI transaction value also went up from Rs 1.09 lakh crore to Rs 21.31 lakh crore during the said period. Total digital payments, in terms of volume, have gone up to 3.4 lakh in 2020 from 70466 in 2016.

 People still prefer to deal in cash to a large extent even though there is an increase in digital transactions. The question that arises here is wouldn’t the digital channels have picked up even without a highly disruptive economic move?

The aftermath?

The government has always claimed that demonetization has had positive impacts on the economy. But not all economists agree with this view. Some say demonetisation broke the back of the rural economy where cash was dominated and disrupted supply chains. The note-ban impact weighed heavily on the economy.

Several studies conducted by international researchers have shown the adverse impact of demonetisation on the Indian economy. Titled “Cash and the Economy: Evidence from India’s Demonetisation”, the study by the US-based National Bureau of Economic Research says demonetisation lowered India’s economic growth and led to a 2-3 per cent reduction in jobs in the quarter of note ban. It also showed that India’s economic activity declined by 2.2 per cent in November and December 2016. 

The debate is still on with respect to the effectiveness of demonetization as a move to attack black money. According to an RTI reply, the RBI’s Board didn’t support demonetization as a measure to counter black money. In his book, “I do what I do”, former RBI governor, Raghuram Rajan disclosed that he never supported the idea of note ban and felt that short-term impacts of the exercise could outweigh the long-term gains.

An analysis of the data undoubtedly reveals that demonetisation has failed to meet its stated goals except in certain areas such as encouraging more digital transactions and more formalisation of the financial system. But the exercise has failed to meet the key objectives, mainly addressing the problem of black money. The pain associated with the exercise has far outweighed the gains. Though change is necessary and inevitable, it would have been better if the government had evaluated the consequences before actually executing such a drastic step.