Demonetisation : An Utter Failure


This article critically analyses the success of proposed goals of the demonetization of high denomination currency notes in the country after one year of its implementation. The article concludes that the demonetization move in India is an utter failure.

To demonetize a particular currency means to declare that currency illegal. This has been a year to the announcement of demonetization of Rs. 500/- and Rs. 1000/- notes in our country. On 8th November 2016, while announcing this, the PM said that the step of demonetization would strengthen the hands of the common man in the fight against corruption, black money and the fake currency used for terrorism. He expressed his full confidence that every citizen would stand up and participate in the 'Mahayagna' of its kind. After some days of this announcement, an appendix of "creation of cashless economy" was added to the above referred goals. This was revised to "creation of less cash economy" soon after that.

It was very difficult to say anything about the success or failure of the move in achieving the proposed goals immediately after the announcement. But after a passage of one year we can see a clear picture of the extend of success in achieving the goals of this move vis-a-vis the hardship imposed on the citizens.

There were estimated 15.44 trillion rupees in total circulation in the form of these notes at the time of announcement. This was an estimated 86 % of cash in circulation.

This article analyses whether the exercise of demonetization achieved the proposed goals of 1. Reducing corruption, 2. Reduction in black money, 3. Reduction in fake currency and terrorism, and 4. Creation of Cash less or less cash economy. The success of any move depends on the preparedness for the move. Before analyzing for any goal, we will look into the preparedness of the government for such a huge exercise.

Preparedness of the Government For This Exercise:

Immediately after the announcement of demonetization, the major chunk of the currency became worthless and people were asked to deposit the old currency in banks to get the new currency. Everything was presented as if the government was ready with full preparedness to exchange the old currency with the new one. People thought that they would deposit the old currency and would get new currency in exchange but the government put restrictions on the amount of money that could be withdrawn immediately. Initially the payment was made in the form of new notes of Rs. 2000/- . Since the cash of lesser denomination was in less percentage of the total cash available in the circulation, people were helpless to get change for new Rs. 2000/- notes. Since an estimated 78% of transaction was in cash, there was an anxiety in people to get old currency exchanged as soon as possible. Long queues were seen at ATMs and banks counters to exchange the old currency. But there was a scarcity of cash and people had to stand in queues for hours together. The people living in rural areas were the worst sufferers, as only 27% of Indian villages have a bank within 5km. There were reports of around 100 deaths during this exercise. The cash condition became normal only towards the end of March 2017. Because of poor preparedness, the government had to made various announcements that added fuel to confusion and ordeal in public.

Reduction in Corruption and Black Money

Some of the news reports during the period said while majority of people were suffering in the queues some bank officers were supplying the new currency to businessmen and others trough back doors. The rampant corruption in the bank sector could be seen during this strenuous period. While some people have to even postpone marriages owing to cash crunch, there were reports of fat marriages of political leaders. This did not cast any adverse shadow on the extravaganza of polling campaigning by any political party during UP elections after demonetization.

During this period, the tax department and government agencies noted sudden rise of deposits in Jan Dhan Accounts (opened for poor people under a government scheme) . The amount in Jan Dhan accounts crossed over Rs 87,100 crore within one month. There were reports of transactions of crores of rupees from these accounts as the cash situation started easing out. The so called black money is held in the form of gold or jewellery, real estate, stokes and foreign currency. It is a well known fact that cash is only a small component of the black economy. According to an estimate, 12% of black money could have been removed by the demonetization. But the annual report of RBI states that illegal notes worth 15.28 trillion rupees had been deposited in banks up to 30 June 2017. This basically means that almost 99% of the "demonetized" money was deposited back into banks. Hence, almost all the black money held in the form of cash also returned back into the banks and wasn't really destroyed. We have seen that while most of the black money came back to banks, most of the housewives and people with small means of earning, who had saved up some cash "secretly" for emergencies over years, were worried about the amounts they saved might be labeled as Black Money and stripped out of them. The government could not give any satisfactory explanation of bringing out Rs. 2000 notes, while Rs. 500 and Rs. 1000 notes were banned. It would be easier for the corrupt officers and businessmen dealing in black money to deal in Rs 2000 notes. The said exercise was not a guarantee that corrupt people will change their mind and will not ask for bribes. So, the exercise was a failure on this ground also.

Destroying Counterfeit Currency and Terrorism:

As far as destroying counterfeit currency is concerned, this move seems to be failure on this ground also. Data from the RBI annual report tells that the total number of fake 500 rupee (old series) and 1,000 rupee notes detected between April 2016 and March 2017 was 573,891. The total number of notes withdrawn stood at 24.02 billion. This means that the counterfeit notes identified between April 2016 and March 2017 were negligible as compared to the number of the withdrawn notes. The reports say that in 2015-16, the total number of counterfeit 500 and 1,000 rupee notes detected was 404,794. Ironically this happened without any demonetization drive. News agencies reported the recovery of Rs 2,000 notes, which have been in circulation for less than a fortnight after demonetization, from two terrorists killed in Jammu and Kashmir. There were reports of recovering fake Rs. 2000 notes from the anti social elements. The news agencies have been reporting a surge in terrorist activities before, during and after demonetization.

Formation of Cashless or Less cash Economy

According to the RBI report, the number and value of cashless transactions shot up right after the demonetization and remained high till about March 2017. Since then it come down to pre-demonetisation levels in October 2017 after the stress of cash crunch relieved fully. In India, cashless transactions are not possible everywhere. Especially in small towns and rural areas, owing to unavailability of credit card reading machines and other digital facilities, cashless transactions are not possible. As mentioned earlier, less banking facilities in these areas is also a hindrance to cashless economy. According to eminent economists cent percent cashless economy is impossible. At present, Cashless transactions are just 5 % of the all transactions.

Conclusion:

The above mentioned analysis shows that demonetization exercise has not been of any success in achieving its goals as it was proposed and vehemently advertised. Not only this move seems to be an utter failure but also led to slowing down of the economic activities and lowering the growth rate. This may persist for a long time and would create a grave situation of unemployment in the country. Centre For Monitoring Indian Economy (CMIE) estimated a cost of Rs 1.28 lakh crore to the economy for the 50-day time period given for the exchange of old currency. This estimate does not include the amount spent on advertisement to count the advantages of this move during the UP elections.


Comments

Author: umesh27 Dec 2017 Member Level: Gold   Points : 5

Demonetization was an exercise to give a jolt to the black money and black money transactions and to that extent it was a successful move. We should remember that it is not a medicine for all woes. The Govt took this measure as a building block for the coming times. People are projecting demonetization as a great step and expecting a lot out of it. It is not so. The present Govt with its honest leadership at the top is trying to clean the system of its evils and in this direction demonetization was a small effort. There are many such measures needed before we achieve some progress in the overall achievement of national objectives.

The author has elaborately given the pitfalls of this campaign but if it is so then we are expecting much more from this move then intended.

Author: KVRR29 Dec 2017 Member Level: Gold   Points : 7

The assumption by the Government that black money means cash is wrong. The Reserve Bank of India got back 98.8% of demonetized currency. This means about Rs 16000/ crore did not come back. Most of this money that did not come back, is accounted for. The large deposits during demonetization can't be said to be black money automatically. The onus is on the IT Department to prove it as black money. It is doubtful whether the IT Department has the resources to check on lakhs of taxpayers.
The changing goal posts of the Government clearly indicate the failure of this exercise. First, it was black money, then cashless society. After that idle money coming into the system and the expansion of tax base. Demonetisation is not the only way to do all these. The Finance Minister and the IT Department were making it clear that they have all the data and can catch the tax evaders. Then why this demonetization? Before announcing this step, the Government announced two amnesty schemes which were used by the real culprits to escape.
The black money always gets generated. It will be mostly in the shape of assets. The Government did not take any follow-up steps after the failure of this scheme. The author has clearly explained the failure of the scheme in a logical manner step by step.



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