The Year After Demonitisation

Published : Nov 09, 2017 09:11 am | By: M D Sridharan

The impact of demonetisation has been strongly felt across the country in many ways. Both businesses across the industry verticals and the general public were affected initially due to the note-ban. Indeed there are many positive outcomes as the demonetisation was inked with several objectives of the government.

“To break the grip of corruption and black money, we have decided that the 500 rupee and 1,000 rupee currency notes presently in use will no longer be legal tender from midnight tonight, that is, 8th November 2016" , said  Prime Minister Narendra Modi,  addressing the nation. With that announcement, demonetisation came in to effect and the currency notes of ` 500 and ` 1000 became no longer Indian legal tender. In all about 6,857.82 million notes of ` 1000 and 17,165.06 million notes of ` 500 valuing separately ` 685,782 crore and ` 858,253 crore respectively were scrapped. 

The objectives of demonetisation, as defined by government in various phases, were to crack a whip against black money, fight counterfeit currency in circulation, formalisation of cash-dependent businesses, bringing back money lying idle in the banking system and hitting hard at the financial backbone of terrorism and naxalism.

The announcement of demonetization not only took the country by surprise but it also invited equal amount of criticism from opposition parties. While some people applauded the decision calling it a bold decision, others became hardcore protesters. Yes, indeed demonetisation has put the people in "serious problems" as the common man and woman felt the pain when the money they had in hand suddenly became invalid and scarce. They were worried to meet their immediate financial commitments such as   meeting daily needs like groceries and fuel.

 A large number of working men and women stood in serpentine queues at banks to exchange the old notes for new ones. Marriages were being postponed. Events have to be cancelled.  Organisations, especially small and medium, have struggled to pay their employees as well as the customers.  The pain continued for several weeks and months across the country   and majority of the people took it in their stride hoping that all their sacrifices would yield real benefit.

Need for Demonetisation

It was estimated that India’s shadow economy is projected at around 28 lakh crore roughly 30 percent of the GDP. Under such a scenario, Prime Minister Modi was faced with dichotomy as the shadow economy was thriving due to the fact that the major part of the SME sector was driven by cash-based operations. While it kept the wheels of Indian economy moving, it was pretty clear that existing tax system was not only inefficient but it also discouraged transparency and honesty.

To upend the system that has been well entrenched across industries, Prime Minister Modi had to implement a short-term shock therapy that would eventually result in the formalization of the economy.

But, the beauty of democracy is that the rule of law protects the rights of citizens, maintains order and also limits the power of an elected government to an extent. In a democracy, the exercise of political power must respect the law, the constitution and the will of the people. So, in a democracy the enforcement of any policy has to undergo certain legislative procedures through the elected representatives before it is implemented.

Also, democracy provides the citizens an opportunity to participate in reforms. But the problem is that the opinions and views are subjected to be influenced from different interest and pressure groups. As a result the system gets pulled in different directions and eventually leads to discontent, which the political rivals like to cash in.

Such scenarios always force the leaders in power to refrain from taking disruptive reforms unless compelled to do so. Unlike Congress, despite ruling the country for well over six decades has historically taken a palliative approach to chronic issues, Prime Minister Modi chose to initiate reforms and go ahead with demonetisation.

Implementation Fiasco

Taking a closer look on the scheme of things that the government had planned before implementing demonetisation would reveal that the government did not pulled it out of a hat.  The BJP government acted methodically, since it came to power. The government first announced plans to open Jan Dhan bank accounts for everyone in the country and gave ample amount of time. Then the government gave two separate windows to people to declare black money stashed abroad and black money and undisclosed assets in the country with tax amnesty or fines.

 But finally after demonetisation, while by and large people have acknowledged despite facing serious inconvenience on a daily basis, experts flawed with the way it was implemented and strongly felt that the scheme could have been implemented in a more effective manner. The government could have also taken in to consideration of the possible issue that crop out after implementation.  

Considering the fact that India is cash driven economy, the government could have kept the tenders legal till the deadline for depositing old currency in banks. Thus, it would have allowed the people to spend them and also it would have given a buffer period to start releasing new currency before invalidating the old currency. Besides, in the meantime the banks also would have been able to recalibrate the ATMs without running out of cash. Also, by making the new notes the same size as the older notes, it would have helped the recalibration process easier and the new notes would have found their way into the ATMs much faster.

Impacts and effects

Demonetisation was inked with several objectives such as flushing out black money, eliminate fake Indian currency, curb terror financing and left wing extremism, convert non-formal economy into a formal economy,  expand tax base and employment and to give a big boost to digitalisation of payments to make India a less cash economy.

 Black money

Of the Rs 17 lakh crore of total currency in circulation in the country, it was estimated that a whopping Rs 3 lakh crore was black money. Clearly demonetisation has choked the supply of black money stacked inside the country and the black money operators, who ran a parallel economy, were visibly shaken. They were forced to either deposit the money into the banks with heavy penalty or be simply destroyed. By and large the clean-up of illegal cash helped the economy to turn around

 Note bank politics

The demonetisation announcement came as a shock and awe for the political parties and politicians, especially the states which had to face the crucial assembly elections. For many corrupt politicians as well as the parties for whom the black money is a lifeline, the pulling out of the old Rs 500 and Rs 1,000 currency notes was a disaster. Because, for decades many politicians and the political parties in the country had believed in the practice of purchasing votes in exchange for notes.  But, on the other hand the demonetisation had helped the election process clean and transparent.

 Real estate cleansing

The one industry which really felt the pinch of demonetisation is the real estate. It is said that real estate is an industry built on black money and it is estimated at least 40 per cent of real estate transactions are done using black money. Demonetisation move had curtailed the huge flow of black money into the real estate sector and as a result the land and the property prices dipped considerably across the country.

Hawala Transactions

Hawala operators received a big blow as demonetisation has crippled the hawala rackets. Hawala rackets run hugely on black money. With black money suddenly being wiped out of the market hawala operations came to a grinding halt.  Hawala network is the major route and means to facilitate money laundering, circulation of counterfeit and terror financing. By stalling the hawala network, it had a telling effect on all the three grey areas.

Counterfeit currency:

Demonetisation has completely paralysed the circulation of counterfeit Indian currency. Counterfeit currency has a debilitating effect on the economy as it seriously devalues the real worth of Indian currency.  In 2016, it was estimated by the Indian Statistical Institute that fake currency amounting to `400 crore was in circulation in the Indian economy and around Rs 70 crore fake notes are pumped into Indian economy every year. It is needless to say that most of the fake currencies circulated in India are of Rs 500 and Rs 1000 denominations.

There have been reports that Pakistan is aiding the counterfeit Indian currency syndicate operators and funnels the counterfeit currency through the frontier at Jammu & Kashmir and via India’s porous border with Bangladesh and Nepal. The government’s decision to pull out the old ` 500 and ` 1,000 notes and replace them with new `500 and ` 2,000 series which have come out with advanced security features has resulted in the collapse of the counterfeit syndicate.

Terror financing:

Counterfeit currency is the oxygen for those indulge in terrorism. Demonetisation has hit the terror financing hard.  Terror financing is sourced through counterfeit currency and hawala transactions. It is not an exaggeration if it is said that demonetization has managed to cripple terrorism and the fact remains that the shortage of currency halted the stone pelting jobs to a great extent. Reports from various investigative agencies released in the immediate aftermath of demonetisation revealed that incidents of crime have reduced by 50%.

With demonetisation, the government crippled terror financing modules and closed all windows for terror financing.

Ever since the demonetisation announcement was made, no major violence was reported from the Maoist infested states like Chhattisgarh, Odisha, Andhra Pradesh and Telangana.

The unrest in Kashmir valley has been put on a backburner.  No stone pelting on security forces has been reported in Kashmir ever since the demonetisation announcement was made.

Demonetisation has severely affected the multiple militant groups operating in the North-East. With the extortion money stopped completely in the absence of cash inflow and hawala operations coming to a complete halt, all activities of North-East militants have shuttered down.

Digital Transactions

Undoubtedly, demonetisation created digital cash payment awareness in the country and has forced the general public to look at digital economy which in a way paved the way for the concept of ‘cashless economy’ in the Indian society. According to the Payments Council of India, the growth rate of the digital payments industry accelerated post-demonetisation by 40-70 per cent. It was earlier in the range of 20-50 per cent


For decades, Indian society has accepted corruption as part of life in the country. Removing that concept which has been deeply ingrained in the minds of the Indian people, with banning and changing currency seems impossible at one go. But the effect of demonetisation and the increase in use of digital transactions has led to a remarkable drop in the level of corruption.

Overall Impact of Demonetization on Indian Economy

In what could be termed as the mother of all reforms, the demonetisation move had some far reaching benefits despite strong criticism from opposition parties. In short demonetisation managed to reduce the ill-gotten wealth, corruption, hawala transactions, terrorism and fake currency to a great extent.

The government reiterated that India's financial system was being cleansed due to demonetisation and claimed that as many as 17.73 lakh suspicious cases had been identified where cash deposits do not match the tax profile. Moreover, an amount of Rs 3.68 lakh crore in 23.22 lakh bank accounts is under the scanner. More than 4.7 lakh additional suspicious transactions have been reported by banks and financial institutions. The government has reiterated that Rs 16,000 crore did not come back to the banks after demonetisation. Undisclosed income worth Rs 29,213 crore has been detected and admitted. Besides, benami assets worth Rs 1,626 crore have been seized and attached.

Demonetisation was India's highest-ever unearthing of black money and a good part of black money has been eliminated successfully. Post-demonetistion, the government also blocked many routes for black money formation. Besides, demonitisation led to a decisive blow to terrorism and Naxalism.

Post demonetisation more people are now ready to pay the taxes, which resulted in more revenue for Indian government. Also, with increased transparency, trust on Indian Economy has gone up many folds across the globe.

More importantly, many informal organizations in the informal sector, which suffered the worst hit by demonetization move, are now turning into formal organizations. The unprecedented increase in formalisation had led to better jobs for the poor. 

With more transparency, more people keep their money in banks which results in more savings. With more money in banks, loans are available to more people. With increased loans, banks get better interests.

Digital payments have received a significant boost as more people rely on digital/ cashless transactions.

But on the other side, post-demonetization, the GDP growth estimates are lowered to 7.1%, which was earlier estimated as 7.8%. Despite the fact that  the GDP growth will be low for the year 2017, the effects of demonetization move ahead  with policies like Digital India, Benami Act, cap on cash transactions and will for sure  spur the GDP growth in the coming years.





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