“So, in this fight against corruption, black money, fake notes, and terrorism, in this movement for purifying our country, will our people not put up with difficulties for some days? I have full confidence that every citizen will stand up and participate in this ‘mahayagna’. My dear countrymen, after the festivity of Diwali, now join the nation and extend your hand in this Imandaari ka Utsav, this Pramanikta ka Parv, this celebration of integrity, this festival of credibility.” – Prime Minister Narendra Modi, announcing the note demonetisation, 8 November 2016.
8 November 2016
On 8 November 2016, Prime Minister Narendra Modi announced the demonetization of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series – essentially, 87% of India’s currency.
- The government claimed that the action would crack down on the use of illicit and counterfeit cash to fund illegal activity and terrorism.
- Persons holding old notes were given time from 10 November to 30 December 2016 to have them replaced, without any limit.
- “Keeping in mind the supply of new notes, in the first few days, there will be a limit of 10,000 rupees per day and 20,000 rupees per week. This limit will be increased in the coming days.”
- “Arrangements will be made at international airports for arriving and departing passengers who have 500 or 1,000 rupee notes of not more than 5,000 rupees, to exchange them for new notes or other legal tender.”
- “Foreign tourists will be able to exchange foreign currency or old notes of not more than Rs 5,000 into legal tender.”
- “One more thing I would like to mention, I want to stress that in this entire exercise, there is no restriction of any kind on non-cash payments by checks, demand drafts, debit or credit cards and electronic fund transfer.”
Six months after demonetization, the country struggles to determine whether demonetization was a beneficial move or not. It is a popular belief that the move was good politics but bad economics. The move reaped the ruling Bharatiya Janata Party rich harvests in Assembly elections in Uttar Pradesh and other states, while at the same time negatively affecting most aspects of the economy. A major obstacle in analyzing the effects of demonetization is the lack of credible or extensive data on the same – it has not been provided by either the Finance Ministry or the RBI. One can only hope that more data will be revealed in the near future so that a detailed, in-depth analysis of the aftermath of demonetization can be made.
It is widely accepted that its stated goals of combating black money and terrorism have been either overhyped or unmet. Furthermore, in the weeks after 8 November 2017, the government transformed the rhetoric from one that revolved around tackling corruption to one that revolved around the need to digitise India’s economy. While this in itself was criticized as a cop-out, even when it comes to digitization, the numbers are unimpressive, with the number of digital transaction falling throughout 2017 to pre-demonetisation levels.
Demonetisation has also claimed the lives of many people. While the exact number is still unknown, it is above 100. The move hit the poor, the farmers, and those citizens employed in the informal sector the hardest.
The main consequences of demonetization can be classified under five headings:
Stated reasons for demonetization
After the Prime Minister’s announcement, the Governor of the Reserve Bank of India (RBI), Urjit Patel, and Economic Affairs Secretary, Shaktikanta Das held a press conference.
- They explained that the purpose of the action was to fight terrorism funded by counterfeit notes.
- While the supply of notes of all denominations had increased by 40% between 2011 and 2016, the ₹500 and ₹1,000 banknotes increased by 76% and 109%, respectively, owing to forgery. They said that forged cash was used to fund terrorist activities against India and that the demonetization had a counter-terrorism purpose.
- Patel also informed that the decision had been made about six months ago, and the printing of new banknotes of denomination ₹500 and ₹2,000 had already started.
- However, only the top members of the government, security agencies, and the central bank were aware of the move.
— Narendra Modi (@narendramodi) November 8, 2016
Criticism of demonetization
- The Supreme Court said, “Discontinuation of higher denomination notes appears to be carpet bombing and not surgical strike.” The SC also warned in November that there “may be riots” because of the serious situation that was prevailing in the country.
- Kaushik Basu noted that demonetisation’s “economics is complex and the collateral damage is likely to far outstrip the benefits”.
- Nobel laureate Amartya Sen said, “It’s (demonetisation) a disaster on the economy of trust. In the last 20 years, the country has been growing very fast. But it is all based on acceptance of each other’s word. By taking despotic action and saying we had promised but won’t fulfil our promise, you hit at the root of this.”
- A 15-member Parliamentary Committee said that because of demonetization, “honest, hardworking and tax paying citizens of India were made to suffer.” In its April 2017 report, the Committee stated that rural households and honest taxpayers were the worst hit by demonetization. It said that it was not just the poor that suffered, but the manufacturing sector was impacted too. According to the panel, demonetisation created significant disruption throughout the economy, because it was carried out without prior study or research.
My analysis of India's demonetization. I feel pretty sure both Amartya Sen & Jagdish Bhagwati will agree with me. https://t.co/Dg1g1Rdpqo
— Kaushik Basu (@kaushikcbasu) November 28, 2016
— Saikat Datta (@saikatd) December 23, 2016
Support for demonetization
- Finance Minister Arun Jaitley said that demonetization would clean the complete economic system, increase the size of economy and revenue base. He mentioned demonetisation along with the upcoming Goods and Services Tax (GST) as “an attempt to change the spending habit and lifestyle”.
- “It is a big reform which no one expected and will have a huge impact on people who are hoarding money and not disclosing money for tax purposes,” mortgage major HDFC Chairman Deepak Parekh said.
- Narayana Murthy said, “… I think it’s a good thing. It brings down black money, corruption … and in some form, it is an incentive for people to use the digital economy.”
- ICICI Bank chief Chanda Kochhar said, “It’s perhaps the most significant move ever taken to curtail the parallel economy. It will give a sharp boost to all formal channels of payments which in turn will help the formal economy to grow at a faster clip in the long term.”
#PresidentMukherjee welcomed bold step of Government of India which will help unearth unaccounted money & counterfeit currency
— President of India (@RashtrapatiBhvn) November 8, 2016
Demonetisation of ₹1000/500 notes & remonetisation with new highly secured currency is a big step towards benefiting Indian economy.
— Arun Jaitley (@arunjaitley) January 8, 2017
Consequence #1: Deaths
- Several people have died from standing in queues for hours to exchange their old banknotes.
- Deaths were also attributed to lack of medical help due to the refusal of old banknotes by hospitals.
- Additionally, there were several farmer suicides in the wake of demonetization (more here).
- By the end of 2016, over 100 people had died due to demonetization.
Consequence #2: Corruption
- As per the Indian Statistical Institute, Kolkata, counterfeit currency in circulation is estimated to be Rs 400 crore, 0.028% of the demonetised currency.
- As per the World Bank estimates, India’s black economy is in the range of 21% to 23% of its GDP. In present GDP terms, the black economy could be approximately Rs 6,800 billion.
- However, approximately 70% of the black assets, Rs 4,800 billion are estimated to be parked overseas, leaving approximately Rs 2,000 billion in the country, of which 5% to 6% are held in cash. (More)
- In an editorial, The New York Times wrote: “There is little evidence that the currency swap has succeeded in combating corruption or that it will forestall future bad behaviour once more cash becomes available.”
- As things currently stand, there simply isn’t enough credible data to conclusive adjudge the effects of demonetization on black money and corruption in general.
Consequence #3: Terrorism
- DC Pathak, former Intelligence Bureau chief, said on November 10, “While removing black money, the process it [demonetisation] will definitely address the problem areas of terror financing and fake currency. There is illegal money behind the terrorist funding. The channel through which the adversary sends in militants and arms is also used to send fake currency.”
- In January 2017, government reports suggested that demonetization had cut terror attacks by 60% in Kashmir, hawala business by 50%, a decline in an organised stone pelting, and an instant setback to the issue of Pakistan-printed high-value fake currency notes.
- However, this trend reversed in a matter of weeks. As the weeks of 2017 passed, terror-related incidents across the country rose again. The law and order situation in Kashmir has deteriorated again and attacks on civilians and security forces have resumed – the most infamous of these being the 24 April Maoist attack in Sukma, which killed 25 CRPF personnel. (More)
Consequence #4: Digitisation
- According to provisional data from the Reserve Bank of India (RBI), April saw total digital transactions of Rs 109.58 trillion, down 26.78% from Rs 149.58 trillion in March.
- Debit and credit card usage in April at PoS machines declined by around 3.5% to 221.5 million transactions from 229.7 million in the previous month, RBI data showed.
- As of April 2017, about 60% of the ATM machines are working, but most of them are running out of cash very fast as they are not being loaded to their full capacity. Though cash supply had improved at the turn of the new year, it has not gone up significantly. ATMs are not being filled to the maximum capacity of around Rs 30 lakh because of insufficient cash supply. In fact, only Rs 10 lakh is being loaded in each machine. (More)
Data (not that anyone cares these days) says that Cash usage is going back to its pre-demonetization level.
Imaginary cashless economy? pic.twitter.com/UzgCKDTl3W
— Srivatsa (@srivatsayb) April 15, 2017
- National Payments Corporation of India (NPCI) CEO AP Hota said, “It is a fact that a lot of cash has come to the market. People who had adopted digital payment transactions out of no choice now have a choice to really use cash.”
- NITI Aayog stated in April that the volume of all digital transactions since demonetisation had increased by about 23 times with 63,80,000 digital transactions for a value of Rs 2,425 crore in March 2017 compared to 2,80,000 digital transactions worth Rs.101 crore till November 2016.
- However, this claim was found to be misleading and in contradiction with RBI data. RBI data showed that the overall volume had gone up just 1.43 times and not 23 times.
Consequence #5: Employment
- In the first 34 days since demonetisation, micro-small scale industries suffered 35% jobs losses and a 50% dip in revenue. (More)
- The informal sector was the worst-hit. As many as 152,000 ‘casual’ employees across thousands of factories may have lost their jobs during October-December quarter, a recent government survey showed.
- According to the Labour Bureau Survey, the manufacturing sector added 72,000 employees during October-December on a net basis, but also laid off 113,000 casual workers, mirroring how factories may have asked those workers, who mainly get paid in cash, to leave during the currency recall’s peak weeks.
Consequence #6: Economy
- The manufacturing sector grew 8.3% during October-December, from 12.8% in October-December 2015-16 and 6.9% in July-September 2016-17, reflecting the poor consumer durables output and sales in the last few months following restricted access to cash.
- India’s factory output measured by the index of industrial production (IIP) already contracted 0.4% in December from a growth 5% in November indicating signs of faltering industrial activity. (More)
- The IMF had predicted that India would grow at around 6% in the half-year after demonetization and most independent economists had opined that GDP growth would be between 6% and 7% for the third quarter.
- The October-December GDP numbers were revealed in March 2017, and India seemingly defied expectations and eluded top economists to retain the title of the world’s fastest-growing major economy. Annual GDP growth for the period was revealed to be 7%, lower than the 7.4% of the previous quarter but higher than the 6.4% forecast by economists in the past weeks.
- Many economists and international analysts have cast doubt on the authenticity of these numbers. (More)
Consequence #7: Agriculture
- Demonetisation has affected every Indian, but it hit the agricultural sector the hardest.
- Agriculture in India accounts for 50% of the workforce. The agrarian economy of India is primarily cash-based and village-based. Farmers tend to be unable to avail digital services as such they tend to be digitally illiterate; in many parts of India, farmers don’t even have bank accounts.
- It must be noted that the timing of demonetization was highly damaging to farmers. It came following an above-average monsoon season, but farmers were unable to cash in on the benefits of abundant rainfall due to the overnight implementation.
- The situation was made more dire and desperate as most farmers have their savings only in cash and the winter sowing period was severely hit.
- Farmers were forced to sell their produce at abysmally low rates.
- Furthermore, when banks failed to exchange the farmers’ old notes or give them loans, local moneylenders exploited the situation by charging inhumanly high-interest rates. (More)