Five Years of Demonetisation

Arshad Shaikh looks at the status of the stated objectives of demonetisation as it completes five years since it was first announced and tries to understand the reasons for its failure and the lessons that the government must learn.

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Arshad Shaikh

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Arshad Shaikh looks at the status of the stated objectives of demonetisation as it completes five years since it was first announced and tries to understand the reasons for its failure and the lessons that the government must learn.


A celebrated American economist once said, “The government solution to a problem is usually as bad as the problem”. His words reverberate as we recall the untold misery and torture that millions of Indians suffered after the Prime Minister of India announced at 8 pm on November 8, 2016 that all Rs 500 and Rs 1000 currency notes would cease to be legal tender from midnight. People scrambled to banks and ATMs, there were instances of violence and many people died while standing in queues waiting for hours and days to withdraw their own money. The entire nation was given just four hours’ notice and this was billed by the government spin masters as a masterstroke and a surgical strike against black money, counterfeit currency and terrorist financing.

However, many remained sceptical of the move and questioned its logic with former PM Manmohan Singh calling the demonetisation decision a “monumental mismanagement failure” and predicting a fall in GDP of around 2%. Therefore, what is the truth about the benefits that demonetisation was going to deliver? Are we better off today or much more remains to be done for tackling the scourge of black money and terror funding? As we complete five years of demonetisation, it makes sense to study the ‘lessons learned’ and create a state where such policy decisions are reached only after due diligence and a broad consensus and the decisionmakers are held accountable for their acts of omission and commission.



Addressing the nation before announcing demonetisation, PM Modi said: “The magnitude of cash in circulation is directly linked to the level of corruption. Inflation becomes worse through the deployment of cash earned in corrupt ways. The poor have to bear the brunt of this. It has a direct effect on the purchasing power of the poor and the middle class. You may yourself have experienced when buying land or a house, that apart from the amount paid by cheque, a large amount is demanded in cash. This creates problems for an honest person in buying property. The misuse of cash has led to artificial increase in the cost of goods and services like houses, land, higher education, healthcare and so on. High circulation of cash also strengthens the hawala trade which is directly connected to black money and illegal trade in weapons. Debate on the role of black money in elections has been going on for years.”

In other words, the government was of the opinion that by turning 86% of existing currency (Rs 500/- and Rs 1000/-) notes into worthless pieces of paper, corruption would be reined in, inflation would be controlled, real estate would become more affordable to the middle class and terror funding would be dealt a body-blow. Of course, the usual retort to nationalism was made to lift the spirits of the people by asking for the ‘supreme sacrifice’. The PM averred: “So, in this fight against corruption, black money, fake notes and terrorism, in this movement for purifying our country, will our people not put up with difficulties for some days? I have full confidence that every citizen will stand up and participate in this ‘mahayagna’. ”



The first assertion of demonetisation and the manner in which it was announced, namely its ‘suddenness’ and ‘sheer unpredictability’ was supposed to have decimated all the black money in the economy in the form of cash. This meant that this illegal black money would never return into the banking system and would rot and waste with the black-marketers and terrorists. Unfortunately, as RBI data revealed that more than 99% of cash was returned to the banks, making a complete mockery of the entire exercise. Even more tragic was the continued denial of this monumental disaster and the government’s absolute refusal to acknowledge it as a proof of its misadventure. This near cent per cent return of cash was not surprising as data from the Income Tax and Enforcement Directorate showed that only 7% of black money is in cash-form, most of it remains in the form of gold, real estate, benami properties, stocks (in the share market) and stashed in foreign bank accounts. Renowned economist Ajit Ranade pointed out: “The cash in circulation prior to November 8, 2016, was 18 lakh crore, and five years later it is 28.3 lakh crore, a jump of 57.5 per cent i.e. roughly a 10 per cent per year growth, higher than the real GDP growth. In these current times of high inflation, the cash with the public is extraordinarily high. This is despite a steep rise in electronic payments and the widespread use of the Unified Payment Interface (UPI). The latter is clocking more than 4 billion transactions every month, and annually will clock 25 billion transactions as against 15 billion in China. But it can be argued that India’s digital journey did not need a demonetisation “jhatka”. It would have happened anyway, as the current pace of adoption shows.”



Transparency International, which comes out with an annual ‘Corruption Perception Index (CPI)’ Report, states: “Corruption is more pervasive in countries where big money can flow freely into electoral campaigns and where governments listen only to the voices of wealthy or well-connected individuals.” Incidentally, India slipped six places to rank 86 among 180 countries in the latest CPI Report. Some media reports indicate that an astounding sum of Rs 60,000/- crores was spent in the 2019 elections. This is twice the amount spent in 2014.

A news story in the New Indian Express (January 2021), citing RBI data, states that the Gross Non-Performing Assets (NPAs) under the present government is 365% more than what the banks suffered during the UPA regime. Similarly, the PSBs wrote off bad loans worth Rs 6 lakh 83 thousand crores in the last six years compared to Rs 32 thousand crores from 2008-2014. Demonetisation targeted the informal economy or the cash economy, assuming that it is the greatest source of corruption, ignoring the fact that real corruption is the facilitation of selected industrialists and financers over all else. This crony capitalism which has gripped our country is corruption of the highest order and yet there is little outcry and almost zero resistance against it.

Libertarian writer Mary Ruwart correctly points out, “As long as government has the power to regulate business, business will control government by funding the candidate that legislates in their favour. A free-market thwarts lobbying by taking the power that corporations seek away from government! The only sure way to prevent the rich from buying unfair government influence is to stop allowing government to use physical force against peaceful people. Whenever government is allowed to favour one group over another, the rich will always win, since they can “buy” more favours, overtly or covertly, than the poor.” It is time for a new anti-corruption movement – “India against Crony Capitalism”.