This week marks the fifth anniversary of the day demonetization broke out across the nation, with just four hours notice. The Prime Minister announced at 8 p.m. on November 8, 2016, that all 1,500 rupee notes would cease to be legal tender from midnight on that day. Indeed, 86 percent of the change was taken away and the new replacement banknotes were not yet ready.

For several months, the Indians did not have access to their own funds. And the small number of banknotes initially issued were all in denominations of Rs 2000, which did not help, as no one had changed (from the new denomination of Rs 500). There were long lines of people outside bank branches and ATMs desperate to withdraw the small limit of 4,000 rupees allowed at the start. There have been cases of riots, attacks on bank staff and deaths, with some of them lining up to withdraw money.

Cruel measure

Seizing people’s property was a very harsh and cruel public policy measure. After 50 days, at the end of December, the government also passed an ordinance (later turned into law) that the possession of old banknotes was illegal (like the possession of drugs). There is a telling irony and pathos, that recently, ignoring the demonetization that happened five years ago, a blind person, who made a living begging in the Krishnagiri district of Tamil Nadu, asked the collector to exchange all of his savings of Rs 65,000 in old notes. Of course, he was refused. There are probably thousands of thousands of these savers who over the past five years have found their savings to be mud but had no recourse.

And yet, month after month, after that fateful November 8 announcement, opinion polls showed strong support for the Prime Minister. People across the country, especially the poor, were convinced that some large fish were fried and were caught with their pants down.

The Prime Minister’s message was that money hoarding was black money, and the sudden, almost “surgical attack” took the big fat black money hoarder cats by surprise. If this thesis was correct, then a substantial part of the demonetized money should not have returned to the banking system. But it became clear in the first 60 days itself, confirmed by the Reserve Bank of India much later in August 2017, that over 99% of the money had been returned.

Only 7% black money in cash

This return of demonetized money to the banking system is not surprising. This is because the government’s own data over several years of tax raids and Enforcement Directorate action had shown that nearly 93% of ill-gotten wealth was in the form of benami land, gold. , real estate, stocks and foreign accounts. Thus, only seven percent of black money remains in the form of cash.

Even then, demonetizing high-value banknotes is a good idea, hinted at by the OECD, the European Central Bank and even the former chief economist of the International Monetary Fund, Ken Rogoff, among many others. But their version of stopping high-value tickets was with 12-18 months’ notice. And certainly not to introduce higher value tickets!

The highest score in the United States is $ 100, which is 0.16% of the value of their per capita income. And most of the $ 100 bills actually circulate outside the United States, not inside. For India, a 2,000 rupee banknote represents 1.3% of the country’s per capita income. This is more than eight times the ratio of the United States. Since it is eight times higher in relative terms than that of the United States, by American standards our highest denomination should be 1/8e of 2,000, or about Rs 350. Thus, a maximum denomination of 500 rupees should suffice. If demonetization was meant to make a big dent in black money, it clearly failed.

Cash in circulation up 57.5%

Incidentally, the money in circulation before November 8, 2016 was 18 lakh crore, and five years later it is 28.3 lakh crore, a jump of 57.5%, a growth of about 10%. per year, higher than real GDP. growth. In these times of high inflation, public money is extraordinarily high. This despite a sharp increase in electronic payments and the widespread use of the Unified Payment Interface (UPI). The latter records more than four billion transactions each month, and will record 25 billion transactions annually against 15 billion in China.

But one could argue that India’s digital journey did not need a demonetization “jhatka”. It would have happened anyway, as the current pace of adoption shows. More importantly, the share of payments (in value) that are instant UPI-type payments is 15.6% according to a study by a US company called ACI Worldwide. Even the Reserve Bank of India’s annual report shows that retail non-cash instant payment systems still have a long way to go. There’s no question that the pace of digital payments adoption is blazing fast, but that shouldn’t be credited with demonetizing.

Changing the goal posts

The goals of demonetization were never clearly stated, and the narrative kept changing over the next year. In the beginning, it was an attack on black money, counterfeiting currency and the financing of terrorism. Then it wiped off the extra income tax and pulled more people into the tax net. Then it was about moving India quickly to cashless transactions. And then again, it was about enabling the ecosystem of fintech companies and innovation in the financial system. None of this has been confirmed.

However, one can use the fallacy “post hoc, ergo propter hoc” to justify that the objectives of demonetization (whatever they are) have been achieved. Not only does “correlation not mean causation”, but also, just because X follows Y, it does not mean that Y causes X. All of this may sound too nuanced, and it will take the Nobel laureates in economics of this years establish the causality between demonetization and subsequent effects.

Undeniably, the following propositions still hold. First, people suffered. Second, the informal sector economy has been hit hard. Third, the popularity of the prime minister, who made the decision his own, has not waned. (This could be attributed to its power to project a “reality-warping field,” as legendary entrepreneur and innovator Steve Jobs often calls it). It is the strength of his charisma.

Fourth, cash is back in circulation, despite a surge in digital payments. Fifth, until the pandemic year, GDP growth steadily declined and the investment-to-GDP ratio stagnated. Finally, the share of the informal economy in the total economy has contracted, although the factors are numerous. The analysis of the contraction of the informal economy is left in another column.

The author is an economist and senior researcher, Takshashila Institution

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Posted on: Monday 08 November 2021, 2:30 a.m. IST