Demonetization - Effects and Defects

8th November 2016 was a red letter day for all honest citizens of India who could sleep soundly after hearing the Modi’s announcement of demonetization, while those with black money under their carpets had to rush to the medical stores in search of sleeping pills!

Yes, Modi had on that day announced in a broadcast to the nation the demonetization of high value currencies of Rs.500/- and Rs.1000/- with immediate effect from the midnight of that day.

Even the word - DEMONetization - contains ‘Demon’ which is being annihilated by the 8th November Master Stroke Announcement. Demon here means black - corrupt - terror - counterfeit currencies that are responsible for all evils of thwarting the peace and economic progress of India as a whole and also tarnishing the image of our country as well. 

Modi, in the course of his announcement, had remarked: “The move complements the country’s Swachh Bharat Abhiyan (Clean India Campaign). For years, this country has felt that corruption, black money and terrorism are festering sores, holding us back in the race towards development. To break the grip of corruption and black money, we have decided that the currency notes presently in use will no longer be legal tender from midnight tonight.”

Finance Minister Arun Jaitley confirmed that the goal of this demonetization is to clean transactions and to clean money.

India is cash economy. According to RBI figures, as of March 2016 currency in circulation amounted to around Rs.16 lacs crores. Of this, Rs.500 notes accounted for 48% in value and Rs.1,000 notes another 39%. Together, they were more than 86% of the value of the notes in circulation. RBI had further observed thus: “While the supply of notes of all denominations had increased by 40% between 2011 and 2016, the ₹500 and ₹1000 banknotes increased by 76% and 109% respectively in this period owing to forgery. This forged cash was then used to fund terrorist activities against India. As a result the decision to eliminate the notes had been taken.”

In the course of his announcement, Modi had said: NDA Govt accepts the recommendations of the RBI to issue Two thousand rupee notes. Perhaps by this, Modi was not in complete agreement with the RBI’s recommendation, but, still, he might have yielded giving credence to their expertise.

The reasons put forth for the growth of black money are said to be the ease by which high value currencies can be kept concealed by the tax evaders and hence the steps need to be initiated for demonetization of such high value currencies. 

Due to this rational, issue of new currency of very high value of Rs.2000 denomination again may perhaps put a common man in a confused state; but, the RBI had come out with the following explanations: “As per data, in 2014-15, the cost of printing the incremental notes of Rs.500 and Rs.1,000 denomination  was approximately Rs.3 thousand crore.  However, that year, the total stock of Rs.500 notes in circulation increased by approximately Rs.4 lacs crore, while that of Rs.1,000 notes increased by approximately Rs.3 lacs crore. If all this additional money (estimated Rs.7 lacs crore) had to be printed using Rs.100 notes, it would cost RBI about Rs.12 thousand crore, which is more than a four-fold increase. This is without taking into consideration the increased costs of operating ATMs and of handling money in general.” 

Though the cost of printing lower denominations in large numbers and other logistics problems might have made the RBI to choose the middle path of introducing the new high value of Rs.2000/- in circulation for the time being to cater to the cash starved economy of India, a review is needed to ensure that this new high value of Rs.2000/- is not being misused. Anyhow, the prudence or otherwise of introduction of this new high value in circulation in the context of demonetization of present high value currencies of Rs.500/- and Rs.1000/- had not been doubted or questioned by the economists in India and abroad!

Majority of the economics world over and also in India had welcomed this measure stating that the size of the cash economy will shrink, as will black money generation avenues, because of the better cash-flow trail.

Crisil, a global S&P company had commented: “Tuesday’s move could change the face of the Indian economy, improve the government’s fiscal position and tax compliance.”

The International Monetary Fund (IMF) had also complimented the Modi Government measures: “We support the measures to fight corruption and illicit financial flows in India. Of course, given the large role of cash in everyday transactions in India’s economy, the currency transition will have to be managed prudently to minimize possible disruption.”

The effects of demonetization can be summed up thus: 

üA bold economic step to eradicate the menace of Black - Fake - Terror Money Market.

üTo reduce the Indian Economy’s dependence on Cash and to make India to march forward towards Less-Cash Market in the near future and Cashless Market in the long run as its goal. 

üTo curb Corruption, Tax Evasion and to make the Economy a transparent one by ensuring all high value transactions to be devoid of cash. It was revealed that Gold and Real Estate Businesses which were aiding the black money market to a very large extent are hard hit to do business in Clean Money hereafter, the benefits of which will be felt in due course.

üTo curb artificial demands in high value investments thereby allowing genuine buyers to get their money worth and clean investments.

üTo improve Tax revenues thereby influencing on the growth rate of GDP.

Defects of Demonetization:

‘No pains - No Gains’ Theory cannot be over stretched and if pains are not tackled 

properly, gains will end up in ‘chaos and riots’ - These are the warnings signals of 

those who are against the demonetization or its implementation.

Even the main opposition party - viz. Congress had not criticised the demonetization 

move as a policy per see - but, found fault only in its implementation causing 

tremendous difficulties faced by all genuine cash holders in exchanging demonetised 

currencies in their possessions for many days standing in long queues and also to 

deposit/withdraw their own money. TMC and APP Parties alone wanted the 

demonetization to be rolled back, while others had expressed concerns for the 

sufferings of the Indian public at large.

There are also questions over whether the ‘master stroke’ is masterful enough to 

tackle the corruption in the country. One Economist pointed out that only a small 

percentage - say less than 6% only - of the unaccounted wealth is held in cash 

and hence this demonetization is a one-time draining of this current stock of black

money, but, unless the root causes of corruption are removed, corruption will 

continue.

Dr. Manmohan Singh, our former Prime Minister had not objected to the decision of 

demonetisation per se, while P. Chidambaram had criticised the demonetisation move

 of Modi Government in toto - even to the extent of saying that he would rather resign

 than to agree to the move, if he was the Finance Minister!

Former Prime Minister told the Rajya Sabha that the ordinary people have suffered as

 a result of this imposition on the country overnight even resulting in deaths of 65 

people while encashing devalued currencies. He further added: This exercise is a 

monumental disaster and is a case of organised loot and legalised plunder. Asking 

people to wait for 50 days for normalcy was like a torture that could have disastrous 

effect on the poor and the deprived. Restrictions to draw money from my own bank 

accounts were never heard anywhere in the world!

Former Prime Minister who is a renowned and learned economist, should have 

substantiated his claims of ‘monumental disaster’, ‘organised loot and legalised 

plunder’ etc. with relevant data - but, his speech was more like a politician than a 

professor of economics. Perhaps, 10 Janpath Spoke!

The most damaging observation came from the Supreme Court, while drawing the 

attention of the Central Government in not taking adequate steps to reduce queues 

outside bank branches seeking to exchange demonetised notes. They said:  "It is a 

serious issue. This affects the entire population. You (the government) cannot deny 

there is a serious problem. There could be riots.” Such remarks from the Apex Court 

are quite unwarranted and it is tantamount to instigating the public to go on riots for 

their redressals! If the Supreme Court has this mind set, then, actually we are in for 

troubles threatening the peace of the land - Laws and not Riots are to be emphasized 

and alas, the Indian Public at large had withstood the Short Term Pains for the Long 

Term Gains by slapping on the face of the Supreme Court!

It is a fact that demonetisation had made the general public to suffer, but it is a great

relief that they had endured these sufferings as they believe that the demonetisation 

would bring to them lasting benefits in future and their longings to have a clean 

economy since long had made the move a grand success. Though the announcement 

of demonetisation might be sudden, Modi Government had taken many steps before 

this announcement so that this major economic step do minimum hardships for the 

majority of the Indian public who are honest and hard working.

In his speech to the nation, he outlined what his government has done so far. A law 

was passed in 2015 for disclosure of foreign black money. Agreements with many 

countries, including the U.S., have been made to add provisions for sharing banking 

information. A strict law has come into force from August 2016 to curb benami 

transactions, or the purchase of property and deals using fictitious names — a way of 

deploying black money earned through corruption. A scheme was introduced for 

declaring black money after paying a stiff penalty. And arching over it all was the 

Prime Minister’s Jan Dhan Yojana, which aimed at financial inclusion for the 

whole country. Launched in August 2014, it has managed to add 250 million bank 

accounts through November 2016. Opening of bank account with zero balance is the 

most revolutionary welcome step to lure poor rural people to the banking system. Yes,

these steps are precautionary moves to announce Demonetization which was kept 

secret till its announcement.

Cashless Economy in India should be possible in the near future - rather it should 

happen to eradicate the Demon of Black Economy and thereby bringing White 

Economy to make India big as a Clean Economic Country. When Kenya had achieved 

this status of Cashless Economy with the large Kenyan Public using M-Pesa (Mobile - 

Money), India can very much achieve that status - when the public at large had 

decided to have it, nothing could stop them.

Hail India! Clean India!