Is demonetization for an economy a boon or bane? In past there have been instances where several world economies opted for demonetization ending up with far ranging results. Let’s first discuss about those events where it created negative result. In 1982, Ghana used demonetization to curb black money and their economy collapsed. So was the case with Myanmar. Zimbabwe, in 2016,

went forward with demonetization to replace it with US dollars, to fight against hyperinflation. It was criticized as it led to decrease in the value of wealth of the people. There are also instances where demonetization has achieved the desired results. In 1969 US went for demonetization in the back-drop of growing black economy, which resulted in growth of its economy. In 1984, Nigeria had followed the demonetization path which brought the negative growing economy on a positive path. EU in 2002 went for a currency change to Euro and facilitated this transition by preparing for it much in advance i.e. from 1998. Having discussed the cases from all round the world let’s examine the impact of demonetization in the Indian context.

India in past had gone for demonetization of high currency notes in the year 1946 and 1978. 2016 was the third instance of demonetization in India. The initial intent behind demonetization by the Government was to curb black money and put a pause on the financing of terrorist activities. But the amount of black money brought to light by this exercise does not justify the economic ramifications. It was also believed that this would help control the problem of counterfeit notes as most of such notes were present in the denominations of Rs 500 and Rs 1000. But due to the lack of foresight on security measures, the freshly minted Rs 2000 Rupee notes are already being counterfeited. Apart from this, the cost of printing new notes amounted to $900 million in 2016-17, doubling from $450 spent a year prior, causing huge losses to the RBI. Although the Government had clear objectives in mind, the implementation was far from ideal. The move caused a massive disruption in the banking sector resulting in long queues in front of banks and ATMs for transaction purposes.

People found an alternate option to deal with the situation by going digital. Various e-wallets like PayTM, Freecharge, MobiKwik and others gained traction. The government also shifted its objective of demonetization to the digitization of Indian economy. This reasoning by the Government faced severe criticism as many believed that proper infrastructure needed to be developed for achieving Digital India and such decision were ineffectual. Also, it is reminiscent of the old ‘carrot and stick’ approach, with the entire Indian population playing the mule.

However, demonetization also achieved a lot of the government's original goals. According to an estimation done by the Indian Statistical Institute, about 4 billion rupees worth of fake currency was in circulation in India at the time and 700 million worth of fake currency was being injected into India each year. Demonetization removed an estimated 160 billion rupees’ worth of black money off the streets. Also, 5.6 million new taxpayers were added and the number of returns filed increased to 24.7% compared to 9.9% in the previous year. Further, demonetization also achieved a large increase in the digitization of payments and has greatly aided the shift towards a cashless economy. Transactions through UPI have seen an enormous jump from 1 million per day in November 2016 to 151.8 million in January 2018. Another aspect of the government operations was the advanced data analytics tools that were used to scrutinize transactions of more than 300,000 shell corporations of which 210,000 were deregistered. The Reserve Bank of India declared that it had received nearly all of the estimated 15,400 billion rupees that were in circulation in the form of high currency bills. Most economists agree that this increased cash in the banking system has had a positive effect on the economy. The resulting liquidity helped reduce the interest rates by 100 basis points. Additionally, bank accounts were opened for more than 5 million workers who now get their wages credited directly to their accounts.

Demonetization had created a lot of confusion among the people. They were unable to exchange their old notes as the supply of new notes were less. Lack of banking facilities in the rural worsened the situation there. According to cash-handling companies such as CMS Info Systems and Logicash Solutions the amount of cash they handled were less by 10-15% compared to the previous year. The government had claimed that this move would remove black money from the system but according to RBI more than 99% of the notes have come back and have been accounted for. The government had changed its stand later and said that move was focused on the issue of counterfeit currency. This too was proven to be ineffective as RBI stated that only 0.0007% of Rs 1,000 notes and 0.002% of old Rs 500 notes were found to be fake. The cost incurred by the government to destroy the old currency and print the new currency affected the economy. Gross Value of informal sectors went down drastically in manufacturing sector, real estate and agriculture sector, where cash formed a huge part of daily wages. The growth in 8 core sectors was 4.9% in November which was 6.6% in October. The Index of Industrial Production for these sectors constituted 38%. Some of these sectors are cements, steel and refinery products. The GDP of India fell down to 7.1% as compared to 8% due to demonetization.

The Prime Minister’s monumental decision to curb black money has attracted both skeptics and patrons alike. A quick analysis of the facts stated above would establish that demonetization clearly has brought about more harm than good. With its egregious implementation driving down economic growth, it was indeed not a popular initiative for the common man. Was it worth the decline of the economy and the damage done to the small businesses? Was it worth the myriad of job losses in the informal and construction sectors? However, one should not be too quick to conclude. The increase in the number of income tax returns filed, as well as in the number of cashless transactions is proof that there is a silver lining to this ambitious exercise. Although these were not the initial objectives of demonetization, there is an opportunity to capitalize on these positives, and re-focus the efforts into transforming India into a digital economy. With the implementation of GST and the mandatory Aadhaar reforms, this is no more a distant pipedream. Therefore, demonetization could as well be the equivalent of a queen’s sacrifice in the longer pawn game that could transform India into an economic behemoth.

References:

Writers:

Anjali Maharia

Anshul Soni

Chetan R Harithas

Mathew Ponodath

Sahil Kumar

Tarun Tom Thekkel