On November 8 last year Indian Prime Minister Narendra Modi came up with a surprise announcement. He declared that the use of all Rs 500 and Rs 1000 banknotes of the Mahatma Gandhi series would be invalid past midnight. He also announced the issuance of new Rs 500 and Rs 2000 banknotes of the Mahatma Gandhi New Series in exchange of the old notes. The sudden announcement created cash shortage in the weeks followed and the whole country was taken aback at this decision of demonetisation. Since then, there have been so many discussions all over regarding this case of demonetisation. Very recently, RBI has come up with the details - regarding the exchanged notes and monetary inflow in the Indian economy in post-demonetisation phase. To gauge whether demonetisation has been a debacle or a boon for the vibrant Indian economy, let us first understand the precursor and the objectives that the central government looked at a year back.
Motives behind demonetisation
There were two main motives behind opting for demonetisation. The first and foremost task was to curb the menace of black money and the secondly, demonetisation was considered to be an effective tool to negate the impact of fake currency. There is no denying the fact that fake currency rackets generally look for faking big value currency notes. Thus Rs 500 and Rs 2000 notes were chosen with a clear-cut move.
Secondary motive (Economic)
It is indeed unfortunate that not many media outlets have highlighted the economic aspect of demonetisation. In spite of coming to power with such huge margin, the Modi government was not able to tackle inflation initially. Apart from that, price rise was also rampant and didn't seem to come down amidst all economic attempts to reduce it. Demonetisation on the other hand indirectly meant lesser transaction, leading to a sudden decrease. Demonetisation never meant snatching personal legitimate money. Thus in all cases, the buying capacity decreased and the omnipresent 'middlemen' in Indian market had no other option but to sit back. The pre-decided upper cap even in case of exchanging notes per day did imply that the market won't be flooded with new notes either. The decision of demonetisation, also gave a fresh lease of life to coins. Previously Indian coins were smuggled across Bangladesh for making ordinary blades. With sudden panic in the market over scarcity of notes took over, the coins came in handy and suddenly all the coins were back in market. As far as real estate is considered, a sector dominated by black money, was hit by this surgical attack. Altogether it can be said that demonetisation had its share of pure economic reasons from both microeconomic and macroeconomic perspectives.
This is actually where the Narendra Modi government played the gamble and it didn't pay off as expected. The 'surprise' element of the demonetisation announcement was necessary but the collateral damage was too heavy. No explanation suffices the deaths of citizens due to this announcement. Why should all citizens who do not have black money and lead a simple life be subjected to such inconvenience? This is where demonetisation faced the biggest roadblock and all political leaders irrespective of their ideologies will accept this. Senior citizens were left with no choice but to stand in the queues for long hours. Working professionals who don't get holidays other than prior permission also faced great inconvenience in the transition phase. The rural economy was the biggest victim. Banks being miles apart, suddenly the villagers, who constitute majority of the unorganized sector were left with no other choice but no work. Migration of cheap unskilled labourers became common and somehow, demonetisation committed an unforced error. Although the central. government tried to give relief within their boundaries, no relief was enough. Inconsistent approach and new announcements and changes every day didn't help the situation either. Suddenly everyone had Rs 2000 notes and no one was willing to give a change of it. The whole scenario was such that the central government was also clueless of the situation. Trade and commerce also witnessed hiccups. Overall, the whole idea or planning in implementing demonetisation was not up to the market or simply didn't live up to the situation. And the opposition leaders didn't miss it to term as 'economic emergency'.
Is India the first country to opt for demonetisation?
Demonetization isn't a new step. Many countries have adopted demonetization previously. Be it Nigeria, Ghana, Zimbabwe, North Korea, erstwhile Soviet Union, Myanmar - all these countries have opted for demonetization as re visionary measure for economy. In 1984, when the Muhammadu Buhari government banned old notes and introduced new notes, the decision backfired and the Nigerian economy collapsed. Ghana also took a similar approach in 1982 and didn't have good results and ultimately people started relying on barter system, making the nation's economy weaker. The decision of the Myanmar government to demonetize in 1987 was nothing less than a hara-kiri and quite interestingly Mikhail Gorbachev's attempt to introduce such in erstwhile Soviet Union paved the path for disintegrating the USSR. The decision of the North Korean government to introduce demonetization in 2010 also didn't give expected results and there was no going back the economy as well.
Did any other country opt for demonetization after India?
After Prime Minister Narendra Modi surprised the whole country with demonetization move, three other countries also opted for this. Venezuela, a country which has been experiencing high inflation rate, demonetized its most valuable note, the 100 bolivar bill. The Venezuelan government gave 3 days to the countrymen and the decision accounted for 70% of the country's cash in circulation. Pakistan, neighbouring country of India also phased out Rs 5,000 notes to curtail black money flow in the shadow economy. Even Australian government had plans to withdraw $100 note from circulation but somehow, they changed the strategy and aborted the proposed approach to demonetize.
What happened to the black/shadow economy?
Every third world country is a victim of black economy or shadow economy. The government doesn't get any revenue from such economy but can't also ignore the presence of it as the black economy involves the sensitive issue of livelihood of millions of people who work tirelessly in the un-organized sector. After Narendra Modi's announcement, India too witnessed the same thing. Migration or backflow of cheap unskilled labourers from the urban domain to the rural domain didn't at all help the case of the rural economy. As of now, rural economy in India is still synonymous with any agro-based economy. The one-directional flow was a direct impact of demonetization on the black economy. It may be the case that all such people who had been involved in black money had been screwed but the collateral damage bringing unemployment can't be ignored either. An immediate economic rehabilitation to such people is almost impossible. In West Bengal, populist Chief Minister went ahead in giving specific grants to labourers who have lost jobs in other states but the initiative didn't get much appreciation from the people either.
RBI's stand on demonetization – Facts and Figures – a year later
n its annual report, the Reserve Bank of India (RBI) has come with latest details on the impact of demonetization. Rs 15.44 lakh crore notes of circulation with denomination of Rs 500 and Rs 1000 notes were taken out. Rs 15.28 lakh crore returned to the system in the whole process. This implies 1.3% of the Rs 1,000 notes in circulation didn't return to the banks. Previously the government estimated that Rs 3 lakh crore won't return to the government but in reality, the numbers were different. 99% of the black money has come back - in other words they have been 'whitened' in due process. Apart from that, RBI has clarified that they don't have any information on how much black money has been removed by demonetization. At Rs 7,965 crore, there has been 133% jump in cost of printing new currency notes in the post demonetization phase. Banknotes were airlifted in various cases and there was software up gradation too for ATMs to accommodate the new currency notes. As a result, remonetization incurred an expenditure of Rs 31,155 crore in 2016-17 on RBI.
But it would be an exaggeration to say that Demonetization was 'bad' for Indian economy. One-time demonetization is indeed never a solution but consistent phasing out is not an easy task either for a country like India. Fake currency notes didn't come under the scanner as the banks received original notes only. Probably polymer notes can bring a permanent solution to the fake currency problem. But no doubt, demonetization experiment was indeed a novel idea, at least something which scared those who don't pay taxes. Is there any relation between the sequences of the announcements - Jan Dhan Yojana – demonetization -GST- reduction in interest rate. Only time will tell!
Disclaimer: The opinions expressed within this article are the personal opinions of the author. MyIndMakers is not responsible for the accuracy, completeness, suitability, or validity of any information on this article. All information is provided on an as-is basis. The information, facts or opinions appearing in the article do not reflect the views of MyindMakers and it does not assume any responsibility or liability for the same.