Demonetization……A disaster forced on India


It was a fateful night of 8th November, 2016 when our honorable PM announced with a big fanfare his decision to demonetize the existing currency of Rs. 500/- and Rs. 1000/- notes. The citizens of the largest democracy in the world were given this ultimatum that their currency has been rendered as virtually useless after the stroke of midnight, save a few services where this currency can be used temporarily.

I remember that evening when this decision was announced. My wife and I were enjoying a nice evening drink with my brother in law at Swagath Lounge & Bar in Sector 26, Chandigarh. All of a sudden, I saw the waiters flipping over the music channels on LCD screens to some news channel where this grand announcement was being made. At first I could not believe my ears and thought that it was a horrible prank being played upon us. However, we carried on enjoying the drinks for the rest of the evening, oblivious to the disaster unfolding in front of us. When we left the restaurant we saw a beeline of cars outside the petrol pumps and in my drunken stupor reality dawned on me that people were really trying to offload their bigger notes.

So before I continue with this article, let me explain the meaning of demonetization. Demonetization is the act of stripping a currency unit of its status as legal tender. It occurs whenever there is a change of national currency: The current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins. Sometimes, a country completely replaces the old currency with new currency.

Now the idea begets a question as to what was the need to demonetize the existing 500 & 1000 rupee notes. They cannot even be classified as larger currencies since an evening out for a couple in a movie hall will cost them around 1000 bucks. So did it really make sense to replace common currency in a country with the world’s second largest population, having a poor digital outreach and infrastructure? Apparently it did to our honorable PM and the RBI Governor who gave it a thumb up only to disappear from the news channels for quite a few weeks thereafter.

So why did the government demonetize the existing currency? Here are some of the reasons that they have stated and continue to do so:

1.) The first and the foremost reason that was stated was that it would reduce the huge pile-up of black money into a pulp of waste paper.
2.) The second reason was to destroy the circulation of counterfeit currency which according to this government is huge in number and is funding terrorist activities.
3.) The third reason was to encourage people to start cashless transactions and hence make a push towards the idea of a “Digital India”.
4.) Demonetization will go a long way in curbing corruption in India.

If one looks at this whole episode of demonetization holistically, one can understand as to how the politicians influence the minds of the gullible voters.

The government claims that 4 lakh crore rupees out of 14 lakh crore rupees floating money in the Indian economy is Black Money. There is no basis to this figure presented by the Government or the RBI. This is the figure that has been given to the courts who are questioning the Government on demonetization.

Now let’s talk about fake currency. How much fake currency was circulating in the market? It was hardly around 60 crore which amounts to 0.001% of our economy. So to counteract this fake currency, did we really need to disturb a 14 lakh crore economy? This problem will take care of itself if all the banks (including the cooperative banks) in this country are provided with proper currency counting and scanning machines.

When the Government realized that demonetization was fast becoming a disaster in progress, they started changing the narrative to introducing India to a cashless economy. What a joke!!! As per the 2011 Census, 30% of the population over 15 years of age is illiterate. When we include people with primary or lower level education, the percentage increases to 55%. It means that more than half of the Indian adult population is not educated enough to shift to digital mode of payments. The situation was not very different in 2016. According to InterMedia’s Financial Inclusion Insights (2015), only 14% of the population (15 years and above) had high digital literacy and another 26% had moderate digital literacy. Forget about the illiterate and semi-literate class, even literate folks struggle with the idea of digital payments. My parents who are both educated, are not comfortable with the concept of net banking and till date do not use a credit card. These estimates suggest that 60% of the Indian population is not prepared for shift to a cashless digital economy.

Another idea defending demonetization was curbing corruption. Corruption is an all pervasive evil which is present in the system itself. Every Tax payer knows where the paid money percolates in the corrupt government system. That is why they shy away from paying the entire tax since the citizen is not getting the intended benefits from the government such as social security, guaranteed employment and better healthcare. Citing corruption and demonetizing the currency is not a way to eradicate corruption. Corruption can be contained overnight if only the government chooses to do so by targeting non-taxpayers, alter the existing laws, draft stringent rules for defaulters and most of all make taxation simple so that no one defaults.

So what have we achieved overall after demonetization? Zilch………

Six months down the line, following are the after effects of demonetization.

The purpose of demonetization was to reduce black money, corruption and fake currency. But apart from reducing fake currency for a while, it completely failed to achieve the other two objectives. It is said 97% of money in circulation came back to the bank (against a target of only 80 to 85%) and corruption didn’t reduce rather it increased in the banking system. Even after filing repeated RTI petitions, RBI refuses to reveal how much cash has come back into the system.

The government’s push for Digital India too is rendered useless as cash flows are back to normal.

The government promised that more money in the banking system will help banks provide cheaperloans, but there is no reduction in loan rates, rather banks have started levying extra charges on transactions and interest on saving account reduced.

Demonetization was supposed to have broken the backbone of naxalites and terrorists, but the situation is now even worse.

The recent GDP data shows that GDP growth rate has gone down from an expected rate of 7.6% to 7.1% and GDP growth rate of 4th quarter is now 6.1% from 7.9% of last year.

Demonetization destroyed many small scale industries and unorganized sectors, causing mass loss of jobs.

About 198 people of this country have committed suicide due to demonetization.

I will sum up the end of this long article by saying this – Demonetization was not really a great idea to begin with. However it caused great disaster due to poor planning and implementation. The only beneficiary of this move has been the BJP which was able to trounce its rivals in the elections in U.P. This government should thank the people of India for displaying great patience and not showing any big outrage against the inconvenience caused to them. I see another disaster in making in the form of GST which will be implemented now. Let us see whether the people of this country will still extend their benevolence towards a Government which is clearly out of its depth with what this economy needs.

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  1. Navdeep Singh

    Superb article..!! A cashless society requires advance infrastructure. Even a superpower like USA is 45% cashless. India was not prepared for it. Unnecessary harassment.

  2. Dr Jyotiraditya

    Yes, It was a disaster … Everyone was discomforted with this unplanned move by “Supposedly” a dictator Government of India. It was the real surgical strike but on people of India. Another unplanned move of this Govt is GST. No doubt It is good for our economy by again the implementation and execution is extremely poor. Moreover, we all are regarded as CHOR by the government. There is nothing like social security to us. but taxes are being levied on us to give freebies to the lower income groups as a bribe so that they keep voting for the BJP govt. We are the people who pay taxes and we are being mentally harassed. The Sad state of India…continues…

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