2 years on, effects of demonetisation continue to be felt as some expectations weren’t met


NEW DELHI: The second anniversary of demonetisation was marked by both parties sparring over whether the policy helped or hurt the Indian economy.


Finance Minister Arun Jaitley, on the two year anniversary of the introduction of demonetisation, said that the ‘prophets of doom’ were proven to be wrong. The objective of the policy, according to Jaitley, was not to confiscate currency, but the scrapping of Rs.500 and Rs.1000 notes led to the formalization of the economy.

In a post to commemorate the two year anniversary, Jaitley writes in part, “Getting it into the formal economy and making the holders pay tax was the broader objective. The system required to be shaken in order to make India move from cash to digital transactions”. Jaitley’s main objective was to move India away from a cash-dominated economy. However, per RBI data, the currency in circulation has risen by 9.5% from two years ago.

The announcement of the scrapping of notes was definitely a shock to the system. It led to a liquidity shortage for everyday citizens marked by empty ATM’s and long lines at others. Businesses were also hit hard with especially small business reporting losses in the following months. In an op-ed for News18 writes on the government’s response to criticism on the two year anniversary of demonetisation – “Demonetisation has often been dubbed as a surgical strike on black money but unlike the actual surgical strikes, the Modi government did not begin celebrating the second anniversary of demonetisation this morning. That should tell us something about the success of this endeavour and what the government itself thinks of this decision”.

The criticism from the opposition stemmed from the 2017-‘18 RBI annual report which stated that nearly all the money that was withdrawn returned to the system. There were expectations that well over Rs. 3 lakh crore of black money would not return to the banking system. However, when the RBI released the report, it stated that only a little over Rs. 10,000 crores of Rs 500 and Rs 1,000 notes failed to come back to the RBI.

In August, Economic Affairs Secretary Subhash Chandra Garg stated that the objective of demonetisation was achieved as it reduced the amount of black money and fake currency and promoting digital transactions. The government has stated time and again that despite the policy, it has not affected the long-term growth prospects of the economy. Arun Kumar, an author of a book on demonetisation titled ‘Demonetization and the Black Economy’, in a column for the Wire, writes on how the government ignored the unorganised sector – “…data from the organised sector is used to claim that the economy has recovered to a 7-8% rate of growth. The government did not survey the unorganised sectors to find out what was happening there”.

One of the hopes from demonetisation was the effect it would have on black money, but it did not have much of an effect. In the aftermath of implementing the policy, the attorney general told the Supreme Court, which was hearing a plea against demonetisation; the government expected a large portion of the black money to be rooted out. Since the black money has come back into the banks, the government claimed that now a paper trail is available to track anyone generating income through black money.

A little over Rs. 10,000 crore of black money is still out there in circulation. Senior Economist and NITI Aayog member Bibek Debroy estimated that 10% of the demonetised currency would not come back into the system. However, these estimates were not correct. One question to be asked is if demonetisation was successful, would the government need to ask the RBI to transfer a third of its reserves to finance its deficit?

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