Demonetization in India: The Great Fiasco
Demonetization in India
The decision of demonetization of Currency notes of Rupees 500 (US$7.40) and Rs. 1,000 (US$15) denomination was taken by the Government of India on 8th November 2016. These paper currency banknotes of the Mahatma Gandhi Series have thus ceased to be the legal tender in India. This accounted for 86% of the total currencies in the system.
Televised Address of Prime Minister
In an unscheduled live televised address at 20:15 IST on 8th November, the Prime Minister of India Narendra Modi announced that the aforesaid currency notes would become invalid after midnight of the day. He declared the issuance of new notes of Rs.500 and Rs. 2,000 denomination to replace the old notes. The banknotes of Rs. 100, 50, 20, 10 and 5 of the Mahatma Gandhi Series and Rs. 2 and Rs. 1 remained legal tender and were unaffected.
Explaining the reasons after the official announcement, the Governor of the Reserve Bank of India, Urjit Patel and Economic Affairs secretary Shaktikanta Das, said in a press conference, that during the period between 2011- 2016, the supply of notes of all denominations increased by 40%, while that of Rs. 500 and Rs. 1,000 increased by 76% and 109% respectively. This was due to forgery and such fake currency was being used to fund terrorism in India. Patel said that the decision was taken six months ago and the printing of new currency notes had already started.
Objectives of Demonetization
The government claimed that the decision of demonetization was taken due to the following four reasons.
1. To stop counterfeiting of the current banknotes.
2. To choke the funding of terrorist activities.
3. To crack down on black money.
4. To check corruption, use of drugs, and smuggling.
History of Demonitization in India
It was in January 1946, that the British Government demonetized the banknotes of Rs. 1,000 and Rs. 10,000 denominations.
Thereafter Jawahar Lal Nehru Government introduced new notes of Rs. 1,000, Rs, 5,000 and Rs. 10,000 denomination in 1954.
The Janta Party coalition government led by Morar Ji Desai demonetized the currency notes of Rs. 1,000, Rs. 5,000 and Rs. 10,000 on 16 January 1978 to curb counterfeit currency and black money.
RBI Increasing the Estimate of Demonetised Currency, to Prove the Success of Decision
Annual Report of RBI on 31st March 2016
Value of total bank notes in circulation
Rs. 16.42 trillion (US$240 billion)
Total bank notes of Rs. 500 and Rs. 1,000 denomination
Rs. 14.18 trillion (US$210 billion)) Nearly 86% of total Currency
Total banknotes in circulation in terms of volume
24% (around 22.03 billion) of the total 90266 million banknotes
Total banknotes in circulation on 28th October 2016
Rs. 17.77 trillion (US$260 billion).
More than 90% of the Banned Currency Deposited in Banks
The demonetization was intended to end the black money which was estimated to be a parallel economy. It was assumed by the government that the honest man will deposit the money and the black money would not come back.
But demonetization has completely failed. Almost the entire black money has become white as it has been deposited in the banks. Black money has transformed itself into new currency notes.
Out of total Rs 14.18 Lakh Crore or 14.18 trillion (US$210 billion)) of demonetized currency in circulation till March 2016, consisting of 15,707 million of Rs 500 notes and 6,326 million of Rs 1,000 notes; more than 12.6 Lakh Crores have been deposited in different banks by 3rd December, and the remaining will be there by 30th December 2016. This huge deposit raises doubts about the success of demonetization.
So where is the Black Money? Just few thousand crores seized by the authorities, for which more than 100 people died. This is going to be the most devastating decision of the Indian Government.
Black money is not an Indian malady. It is a universal problem. Even developed countries could not eradicate black money.
Now the next option will be to reuse the demonetized currency to save the printing cost of new notes. Due to the carelessness of the authorities, the move became more a currency conversion or currency swap than demonetization. It turned out to be an exercise to convert black money into white.
Demonetized Currency ( One Crore = 10 Million)
Number of banned notes of Rs. 500 denomination
Number of banned notes of Rs.1000 denomination
Total number of notes banned
Capacity of all printing presses to pint notes in numbers
2600 Crore of any denomination per year
Number of Printing Press in India
2 of Central Govt at Nasik and Devas and 2 of RBI at Mysore and Salmoni
Time to print 15,000 Crore currency notes in Rs. 500 denomination
Time to print 300 Crore currency notes in Rs. 2000 denomination
Recklessness of Reserve Bank of India
The new notes could not fit into the ATM as they are smaller in size. There are 2, 20,000 ATM in India. The ATM contain 4 cassettes of different sizes in which the notes of the different denomination are loaded. The new notes of Rs. 500 and Rs. 2000 denomination are not of the usual size of banned notes of Rs. 500 and Rs. 1000 denomination, while they should rather have been similar. So the immediate need of replacing 4, 40,000 cassettes of ATM appeared. This delayed the relief to the people and the new currency became less available. Still, all the ATM have not been re-calibrated.
It will take more than 120 days for all the Currency printing Press, working day and night to replace the total demonetized currency and the PM of India just demanded 50 days. This is the height of carelessness about such a sensitive matter.
The replacement should have been planned. The people should get their money. The currency should have fitted into the ATM.
The RBI Governor has declared that by 21st December, the new notes of 5.92 Crores have been released since the demonetization of 8th November. The Bank has just replenished one-third of the banned currency. Ironically this time he did not disclose the actual figure of the banned currency deposited in the banks.
But on 3rd December 2016, the RBI declared that Rs. 12.6 Lakh Crore had been deposited in different banks.
Inactive RBI Governor
Urjit Patel, the new Governor of RBI did not react on demonetization, while not only the consultations but the strong recommendations of RBI is mandatory to take such a decision of great financial importance.
The people have the right to know when money will come so that the queues may end.
Allegations of Favoritism
It has been alleged in media that, before demonetization, several Union Ministers had declared that they were holding large amounts of cash. Even the Finance Minister is reported to have more than 65 Lakh rupees in cash. It is still a mystery about where and when they had deposited their cash.
LRS Increased Foreign Remittance
During the tenure of previous government, the maximum limit in Liberalized Remittance Scheme i.e., to send money overseas was US $ 75,000.
But the present government increased this limit in the very first week of coming into power to US $125, 000 and then increased to US$ 250,000 on 26th May 2015. This decision has increased the remittance of Indian money to foreign countries.
Mauritius Route Treaty
Everyone knows that the black money is in Swiss banks and Panama. But for the last five years, more than 33% of FDI in India is from Mauritius Route as a participatory note. It is in the form of Benami or pseudonym Shares of Companies, where the black money of Indians come back after traveling overseas and gets legalized. This route should have been stopped.
But is is very strange that 3 days before demonetization, this Mauritius Route Treaty was extended.
Prior Leakage of Demonitization
According to the RBI Governor, only the top government officials, security agencies, and RBI were aware of the move. But the media had already reported about the introduction of Rs.2, 000 denominations way back in October 2016, well before the RBI announcement.
This version has caused great controversy, as six months earlier; the RBI Governor was Raghuram Rajan, not Urjit Patel. And the new banknotes have the signature of the newly appointed Governor. How the latter had started signing new notes before assuming the post.
In April 2016, Akila, a Gujarati newspaper published the news about demonetization, two months time for exchange of old currency and the release of new notes of Rs. 2000 demonetization. Later the newspaper claimed that it was a prank on 1st April.
A fortnight before the official announcement, the Hindi daily Dainik Jagran quoted RBI sources about the release of new Rs. 2000 rupee note alongside withdrawal of old Rs. 500 and Rs.1000 notes.
The Chairman of the State Bank of India made a public statement about the coming demonetization way back in April 2016.
The Communist Party of India (M) alleged that the BJP unit of West Bengal had prior information about demonetization and they deposited money in banks just before the announcement.
Arvind Kejriwal, the Chief Minister of Delhi also claimed that the decision was not a secret. He said that Sanjeev Kamboj, a local BJP leader in Punjab, posted the pictures of new Rs. 2000 notes days before the official announcement and a sudden increase in bank deposits between July and September 2016 was due to the leakage of the news.
The Congress party demanded a probe into this huge jump in bank deposits before the demonetization.
Arvind Kejriwal, Nitish Kumar ( Chief Minister of Bihar) and Rahul Gandhi ( Congress) alleged that the ruling BJP made large purchases of land in Bihar ahead of the demonetization due to prior information of currency ban.
Total Bank Deposit Increased in September
The Scheduled Commercial Banks of India surpassed the previous records of deposits of last two years in September 2016.
As per RBI details Rs. 102, 08,290 Crore Or 102 Lakh Crore arrived in the banks.
This amount was was 5.89 Lakh Crore more than that received in August 2016.
It amounted to an increase of 13.5 %, which raises the doubts of leakage of the decision of demonetization as alleged by the Chief Minister of New Delhi.
Guidlines for the Exchange of Demonetized Curency
The RBI laid down a detailed procedure for the exchange of the demonetised banknotes. Following are the key points:
- The banned currency could be deposited in any office of the RBI or any bank branch till 30 December 2016 to credit the value into respective accounts.
- Only Rs. 10,000 per day and Rs.20, 000 per week per account could be withdrawn from 10 to 13 November 2016. This limit was increased to Rs.24, 000 per week from 14th November.
- Old banknotes could be exchanged for the new Rs.500 and Rs.2, 000 notes as well as Rs.100 banknotes in the bank branches by giving valid Identity proof and filling up a requisition form till 30 December 2016. This limit was fixed at,
- Rs.4, 000 per person from 8 to 13 November 2016.
- Then Rs. 4,500 per person from 14 to 17 November 2016.
- Then Rs. 2,000 per person from 18 November 2016.
- Then all exchange was abruptly stopped from 25 November 2016.
- The indelible ink used on the fingers of the people in the banks from 14th November 2016.
- One person could exchange the notes once from 15th November 2016.
- The old notes of Rs. 1000 to be deposited in banks only from 1st December 2016.
- In the beginning, all ATM dispensed only Rs. 50 and Rs. 100 and ATM cash withdrawals restricted to Rs.2000 per day from 14 November onward.
- Re-calibrated ATM to dispense new Rs. 500 and Rs. 2000 notes with a maximum withdrawal of Rs. 2,500 per day, while other ATM dispensing Rs. 50 and Rs.100 notes had a maximum withdrawal of Rs. 2000 per day.
- The petrol / CNG and gas stations, government hospitals, railway and airline booking counters, state government recognized dairies and ration stores and crematoriums were given relaxation to accept the old Rs. 500 and Rs. 1,000 banknotes until 11 November 2016.
- This relaxation modified till 14 November 2016.
- Again extended till 24 November 2016.
- International airports to exchange total notes of Rs. 5,000 from tourists/ passengers.
- All these relaxations were withdrawn from 22 November.
- The Rs. 500 notes would be accepted here until 2nd December.
- On 17th November 2016, the families could withdraw Rs. 2,50,000 for wedding expenses from one KYC compliant account. The farmers permitted to withdraw Rs.25, 000 per week for the crop loan.
- On 21st December 2016, the limit for depositing old currency in the banks was restricted to Rs. 5000 per person subject to an explanation that why the money was not deposited so far.
- On 22nd December the previous restriction was waived.
The Government of India, Finance Minister, and RBI remained confused about the rules of demonetization and total 59 instructions were issued; some modifying the previous ones, others overruling the old ones and some were novel. The assurances of PM too were overruled.
The people at Mumbai exchanged old notes @40% commission. At Bangalore, it was 10%, while some bank managers were doing the same at 10%. The government gave an option of 50% tax and penalty plus surrendering interest on another 25% of the deposit for 5 years, which amounts to 12% at prevalent rates. The people will not pay 62% to convert their black money.
Reasons for the Change of Exchange Rules
The people devised novel methods to exchange the demonetized currency.
1. The people circumvented the restrictions on exchange and made multiple transactions at different banks. Then the indelible ink was used, but the Election Commission of India objected to its use in banks.
3. As per relaxation, the people used old currency to pay outstanding / advance taxes of municipal and local bodies. A record collection of Rs 1.6 billion (US$24 million) of Hyderabad Municipal Corporation was reported.
4. A large surge appeared in the booking of 1A and 2A classes of Railway tickets to claim cancellation refund. Late the Railways denied cash refund of Rs. 10,000 and above with a condition of cheque or electronic payments.
5. The backdated accounting was carried out by several business establishments, co-operative banks, jewelers, I Phones sellers etc.
6. The black money was being exchanged on commission basis @ 10% to 40%. The game of black money confined to few corrupt people became a cottage industry throughout India. Then the Government of India also jumped into the competition and tried to earn something in the process. The PM again announced the 50-50 scheme for black money.
The Income Declaration Scheme (IDS)
This scheme of Government of India remained open from 1st June 2016 to 30th September 2016. Here the black money holders could declare the assets and pay 45% tax and penalty to get it legalized.
Bank Loans of Big Business Houses Written Off
After demonetization, the Indian Banks wrote off 1.14 Lakh Crore Rupees of Big Business Houses. SBI wrote off about 8000 Crores of Vijay Malaya. The Bad Debt of Rs. 8 Lakh Crore are still pending and would be dealt after demonetization.
Why the Government is not waiving off the loans of the farmers, who are committing suicide. The previous government waived off the loans of the farmers to the tune of 70,000 Crores in 2010.
How much could the Bad Debt be recovered?
Actually, the bank tries to recover the loan. But when it fails, the RBI norms say, " Waive off the loan, if there is no recovery”. It is called the banking prudence.
But the defaulters reschedule the loans, either by increasing the loan amount or increasing the payment term. The Bad Debts here are being written off. There is a difference between waiver and write-off. The waiver could be recovered.
Consequences on Economy
The immediate effect is a liquidity crisis, as 86% of the currency has been withdrawn. The situation is similar to the draining of 86% of blood and the death is imminent. The people are patient and will wait and manage the affairs.
The cash goes into working capital, but now the cash has been removed. So there is a great scarcity of cash needed for the growth of the economy.
The consumer demand has been reduced. The people are afraid to spend as they do not know when the cash will arrive and they do not want to do away with the cash in hand.
The small traders, hawkers or vendors who purchase the raw material on daily basis and sell it on streets have no working capital. They have lost it first due to the absence of customers and second due to the loss of working days in queues. Those involved in the business of perishable items are the worse hit.
Adverse Effects of Demonitization
The demonetization has become a great fiasco as it has miserably failed to achieve the objective for which it was undertaken. It is having severe detrimental effects on small scale industries, businesses, agriculture, transportation, trading etc.
Braving the cold waves, the people of India are forced to queue up outside the ATM of different banks, but soon the cash machines become empty. Around half of the ATM in the country is non-functional and there is a great cash crunch even after 55 days.
About 10 Lakh youth come into the workforce every month. But instead of the tall claims of present Government to provide 2 Crore jobs each year, the present demonetization has reduced the jobs.
The people including Nepali workers having no bank account or proper Identity proof had to exchange the money on the commission basis.
More than 120 people died due to the inconveniences caused in queues. The refusal to accept old banknotes by hospitals also caused several deaths.
In unorganized sector, the wage earners and laborers are retrenched, as there is no cash to pay them. There has been a loss of several man days or working days.
The organized sector has reduced the production, as the top two Auto Companies are working or three days a week only. There is no money for the workers and suppliers and no cash is coming back from the retailers. The whole country is standing in queues.
Some violence was reported in New Delhi, 6 banks branches and ATM were attacked in Uttar Pradesh. A shop was looted in Madhya Pradesh when the shop owner refused to accept the old currency.
It has destroyed the age old Indian culture. The festivals and family occasions like marriages which enrich the Indian culture are being destroyed. The common man cannot marry off his daughter as he wishes or dreams of throughout his life.
Even a father fails to get money from the banks after being there for three days so that his daughter could undergo emergency surgery. Ultimately the girl dies. An aged man dies of the heart attack outside the bank ATM. The common law also ensures that no innocent person should be penalized. A common Indian is not a fool but patient and is watching.
Gold and Jewelry were sold at double the prices creating more black money, defeating the very purpose of demonetization.
Even the BSE SENSEX and NIFTY crashed 1,689 and 50 stock indices respectively which is six months low than the last one.
About 800,000 truck drivers were affected by the scarcity of cash and around 400,000 trucks remained stranded at major highways across India.
All major highway toll junctions witnessed long queues. Then Union Minister of Transport, Nitin Gadkari suspended toll collections throughout India till 11th November, then until 14th and later till midnight of 18th and again till 2 December 2016.
The agriculture sector is heavily dependent on cash and farmers had no cash to purchase seeds, fertilizers, and pesticides and they conducted protest rallies in Gujarat, Amritsar etc.
The demand of card swipe machines has increased. The sale of e-commerce companies declined by 30% in cash on delivery orders, but they welcomed digital payments.
The usage of the debit card, credit card and e-payment options of Pay-TM and Pay U Money has also seen a rise. Even on 9th November, the debit credit card transactions rose by 108% and 60% respectively.
Death Blow to SSI
The demonetization has dealt a severe blow to the Small Scale Industries (SSI), most of which are either closed down or are on the verge of closure. The real objective of demonetization seems to finish the SSI and provide an independent platform to Big Business Houses (BBH).
How it Happens
The large industries are more skilled than SSI’s. As an example, the daily production of jaggery in SSI is just 10 sacks, while the sugar industry produces 5000 sacks. In the former, the cane juice is boiled and thickened in big cauldrons by using more fuel which increases the production cost. In the latter, the evaporators are used and the workers are more skilled and highly paid, there are quality control labs and production cost is low. Same is the case with textile, paper, rolling mills etc. Even then the SSI’s compete with BBH.
All previous governments supported SSI as they produce more employment, e.g., 5000 sacks producing sugar mill needs 1000 workers, while the same production of jaggery in SSI employs 20,000 workers. SSI’s are entrepreneurship development centers and need protection to grow. Their production cost is more but they carry the weight of the society.
Now the SSI purchases, cane pays wages and sells jaggery in cash. They do not pay excise duty or Sales Tax or Income Tax and demand tax holidays. It may be an illegal business, but the rules could be amended. Cash payment saves them from tax payments.
Herein lays the defects of demonetization. The government wants the SSI’s to sell and purchase through banks, come under taxation and pay for the Provident Fund (PF) of the workers. Payments through banks would necessitate PF. The cane production too could be taxed through market committees which would further increase the production cost and they will fail to compete.
The bank financing to SSI’s increased by 2.4 % in January 2016 but went down by 3.6 in June 2016. The SSI’s are under pressure as new technologies have hindered their growth and they have no funds for modernization.
Small Traders, Vendors, and Hawkers
One can purchase vegetables by placing online orders to the chain of Big Grocery Stores. But this option has killed the business of street-sellers. Similarly the small vocations of bakery, biscuits, tailoring, taxi services etc. are being snatched by BBH.
This terrorism of technology would kill SSI’s and small traders.
All these evidence indicate that the government wants to encourage the BBH which pay the taxes, while SSI’s pay nothing. More taxes would increase the salaries of the government employees and would increase more Govt. Contracts.
That is why the govt. plans that the SSI’s should work through banks, hence demonetization. Force them to pay taxes and they will close down their business.
This would create the Clean Economy.
In the early fifties of the 20th century when the Indian government decided to use Hindi as a sole official language, there was great opposition in Southern India. One person underwent self-immolation and Jawahar Lal Nehru, the then Indian Prime Minister withdrew the decision, saying that no such decision is important than human life.
But at present more than 100 people standing for their turn outside the banks have died due to demonetization and the PM Narinder Modi is nonchalant.
Facts Behind Dmontization
The present economic system could never bridge the gap between the rich and the poor. The Union government says that the decision is better for the poor, then why it has been weakening MNREGA (Rural Employment Guarantee Program for 100 days in a year) for the last 31 months.
On the other hand, the Corporate Taxes are being reduced, the labor laws being weakened, the wages not being enhanced and the safety of whistleblowers is not being ensured. Those opposing the government are being termed as traitors. The close relatives of Government officials are being given an option to declare their assets. Will these efforts reduce black money?
This aggressive implementation of new economic policies is very dangerous. The capitalist economy could never be established until the traditional culture is destroyed. It happened in 16th and 19th centuries in the US and Europe. The demonetization too is a step in his direction.
These efforts should have been supplemented with MNERGA, mid-day meal and subsidized ration so that the poor man could survive.
The hoarders of Black money are very clever. They know that there is a complete Income Tax waiver scheme for the entire tribal area of North Eastern States of India including Ladakh. Hence the black money currency is flying towards these regions.
Opposition in Parliament
Demonetization was severely criticized by the opposition in the Winter Session of Parliament leading to an impasse. The Congress-led opposition opposed the issue in the Parliament.
The debate was initiated by Congress MP Anand Sharma in Upper House on 16 November 2016. Congress MP Pramod Tiwari accused the PM of demonetization and compared him to Mussolini, Hitler, and Gaddhafi. Praful Patel accused the government of not even re-calibrating the ATM to accept new currency. He said that nobody is questioning the intention, but it is the unpreparedness to execute.
Mamata Banerjee, the CM of West Bengal led a delegation of Trinamool Congress, Aam Aadmi Party, Shiv Sena, Patidar Anamat Andolan Samiti (of Hardik Patel) and National Conference to the President of India to protest against demonetization and demanded the withdrawal of the decision.
Prem Chand Gupta questioned a statement of PM from the unscheduled TV broadcast of 8th November. He said that, if the move was planned ten months ago, then how the new RBI Governor Urjit Patel appointed two months ago could sign the new notes?
The former Chief Minister of Uttar Pradesh Mayawati and Prabhu Das compared the situation to "a financial emergency", by saying "It looks as if India has been shut down."
Sitaram Yechury from CPI said that only 6% of the black money in India is in the form of cash and demonetization won't curb black money.
In a public meeting on 17 November 2016, the CM of Delhi Arvind Kejriwal and West Bengal CM Mamata Banerjee demanded the withdrawal of demonetization in 3 days.
On 17th and 18th November 2016, the opposition and the government clashed over the issue in Parliament.
On 24 November 2016, Manmohan Singh, the former PM said that this scheme will severely hurt the small industries and farming sector. The GDP would decline by about 3 percent. He asked the PM to give examples of countries where people are not allowed to withdraw their own money from the banks. New notifications and rules brought out every day badly reflect on PM Office, Finance Minister, and the RBI. Why has the Cooperative banking been prevented from handling cash? Finally, he termed the demonetization as an "organized loot and a legalized plunder of the masses.
P. Chidambaram (Former Finance Minister)
Whoever planted the idea of demonetization didn't know elementary economics.
Expert Opinions against Demonetization in 2012
In 2012, the Central Board of Direct Taxes advised against demonetization. It said that it may not tackle the menace of black money, which is generally held as Benami (Pseudonym) properties, bullion, and jewelry.
The Income Tax probes found that the black money holders merely retain 6% or less as cash, hence targeting cash were not advisable.
As early as in 2014, the BJP spokesperson Meenakshi Lekhi had opposed demonetization. She said that the general illiterate public has no access to banking and would be adversely affected by it.
Nobel laureate Indian economist Amartya Sen, severely criticized the demonetization move calling it a "despotic action".
The entire opposition including Congress, CPI, CPIM, AIADMK, BSP, DMK, TMC, JD (U), NCP, RJD, and SP observed a protest day November 28, 2016. They protested in front of different banks and demand the return of people's money. In Bihar, 15 trains were blocked and stranded. Protest marches and rallies were organized in West Bengal, Maharashtra, and UP. In Kerala, the shops, business establishments, school, and colleges remained closed throughout the state and the movements of private vehicles were disrupted at different places.
Criticism of Court and Experts
Initially, this move against black money was appreciated, but its execution causing hardships to common people was criticized.
“It appears to be carpet bombing and not surgical strike", as claimed by the Government. (The Supreme Court of India)
“It is like blasting the tyres of a running car with a bullet”. (Famous economist Juan Deze)
“The decision will have a severe effect on Indian economy and some other option could have been tried against black money”. (Prof Basgget Haulsorm, Nobel Laureate in Economics in 2016)
Due to weak investment, the GDP of India will come down to 7% from the estimated 7.4% and would adversely affect the cash dependent small and medium business activities. (Asian Development Bank)
“It is a major mistake which will cause much damage than possible benefits as anticipated”. (Kaushik Basu, the former Vice-President and Chief Economist of the World Bank)
“It is a hollow move since it did not really address any of the purported goals of tackling black money or fake currency”. (Pranab Sen, former Chief Statistician, and member Planning Commission of India)
“It is a witless, anti-people move causing great hardship to the people and little effect on black money”. (Prabhat Patnaik, a former professor of economics at the JNU Delhi)
“Demonetization 'looks like a bad idea’, badly executed on the basis of some half-baked notions”. (Renowned economist and journalist, T. N. Ninan in Business Standard)
“The move had derailed the economy, and the outcome is doubtful”. (Deepak Parekh, Chairman of HDFC)
The Decision- More Political and Less Economic
All the political parties were given the relaxation to deposit the demonetized currency in the banks without any tax liabilities and any questioning about its source.
This entire exercise seems to get political donations for the BJP, as the donors lavishly oblige the ruling party.
The politicians can deposit the black money in party account and later get it back in elections. Those depositing more cash in party account cold later become Ministers and Chief Ministers.
Only two Indian leaders, Arvind Kejrival and Mamta Banerjee have criticized this decision, they both deserve to be the PM of India, and they will become so one day.
Demonetization is a process to revive Indian banks facing a cash crunch, NPA or Bad Debt. For survival they need money and to hold it for 4 to 5 months.
It is an attack on an unorganized economy and household savings.
Viewpoint of RSS
S. Gurumurthy, the economic thinker of RSS, the extreme Hindu outfit and ideological base of ruling BJP, says that the new currency notes of Rs. 2000 denomination too wold be banned in next 5 years as it was launched to face cash scarcity and the new Rs. 500 note wold be the largest currency in India.
But this statement has reduced the faith of the people in Indian currency.
Several bankers and international commentators have welcomed the move as a bold crackdown on corruption.
IMF supported the efforts of Indian PM to fight against corruption.
The President of India has welcomed the demonetization as a bold step.
Vice-President of European Commission Jyrki Katainen and former PM of Finland has welcomed the move to bring transparency and strength in Indian economy.
Justin Rowlatt, the South Asia Correspondent of BBC praised the move for its secrecy and success.
Tim Worstall welcomed the macroeconomic effect of the move in his article in Forbes.
Mikael Damberg, the Swedish Minister of Enterprise supported it as a bold decision.
Global Times, the state media of China praised the move as a "fierce fight against black money and corruption.
The Finance Minister of India said, along with the upcoming GST, it would clean the complete economic system, increase the size of economy and revenue base and change the spending habit and lifestyle.
Former Chief Election Commissioner of India S. Y. Quraishi hoped it to lead towards long-term electoral reforms.
The Congress spokesperson Randeep Surjewala welcomed the move with skeptical consequences.
The Chief Ministers of Himachal Pradesh, Bihar, and Andhra Pradesh supported the move.
Arundhati Bhattacharya, the Chairperson of SBI and Chanda Kochhar, MD & CEO, ICICI Bank, appreciated the move to curb black money.
Businessmen Anand Mahindra, Sajjan Jindal, Kunal Bahl etc. supported the decision and hoped that e-commerce would speed up.
N. R. Narayana Murthy of Infosys praised the move.
Social activist Anna Hazare hailed it as a revolutionary step.
The opinions of the masses vary both ways on social media and triggered protests throughout India.
Positive Outcomes of Demonitization
1. The Income Tax departments confiscated new currency at different places throughout India. The details of which would be available after 30th December. Cash worth of Rs. 4.4 million (US$65,000) was seized in Chattisgarh.
2. New Rs. 2000 notes have been seized throughout the country despite a weekly and daily limit on cash withdrawal from banks. Like 4 crore in Bangalore, Rs 33 Lakh in West Bengal, Rs.1.5 crore in Goa,18 Lakh in Tamil Nadu, Rs. 10 crores in Chennai, and Rs. 242 crore other places.
3. Media alleged that people were dying in queues for few thousand rupees, while some persons amassed crores of rupees in new notes.
4. As per reports the activities of insurgent Naxalites also got interrupted. A petrol pump owner was arrested at Ranchi while trying deposit Rs. 2.5 billion. This money belonged to banned CPI (M) and more than 300 insurgents surrendered due to the shortage of cash.
The Achievements of Present and Previous Government.
The Union government declared in parliament that during the last 31 months the State confiscated 1, 25,000 Crore of Black money. Out of which 61,500 Crore came from Income Declaration Scheme ending 30th September 2016. Under Section-132 (4) of Income Tax, about 21,354 Crore was recovered from the people and business. Under Section-138 (A) of Income Tax Rs. 22,475 Crore was received during the survey from the taxpayers. Rupees 8186 Crore of undeclared income arrived from HBC Bank Geneva after the revelations made by the French Government in 2011. Rupees 5000 Crore was received through the revelations made by the union of international whistle-blowers. This total amount comes out to be 1, 22,265 Crore.
On the same parameters, the previous UPA government recovered 1, 30,800 Crore Rupees of black money during its tenure in the last 24 months. This achievement in six months less period is more impressive.
Illusive Majority Opinion
The app which declared that demonetization is supported by 93% public, is a personal app of the PM in which the address of BJP office of Delhi is given.
The present government is whimsically trying to control several public institutions like the Film and TV Institution Pune, Indira Gandhi Art Center, History Council, NIFT, etc.
RBI is a great hurdle in the process of turning India into a Company, as it is run by different rules.
Just getting elated on the illusion that 90% of the people are in favor of demonetization is "Authority in Majority", while the social-economic complications are being swept under the carpet.
Most of the people are in favor of dowry or child labor and disfavor girl education and women rights, but the system has made the rules to reject the majority opinion. The whims of the majority are dangerous and destructive for the system as it leads to the making of Taliban.
It is contrary to the sense of natural justice to penalize the entire country in order to bring few black money hoarders to books. And ironically this objective still appears to be an utopia.
Cashless Political Donations
Why is the cashless transaction not being made mandatory for the Political Parties? They should have been made, not to accept donations in cash.
PM Patronising Private Players
The PM of India took upon himself the responsibility to advertise the private Digital Payment Systems, like Pay-Tm or Reliance Jio Money, instead of the UPI App of RBI.
Pay-Tm is a Chinese company in which Alibaba has the controlling 40% shares. This company pays no interest in the wallet and when the money is transferred back to the bank account, it charges @ 4.75 %. But due to increase in transactions during demonetization, this amount has been reduced to 1.67%.
New Agenda of Cashless Transaction
In order to shift the issue of the failure of demonetization, the Government has adopted a new agenda of a cashless economy in India which is 98% cash economy.
But in Sweden where just 2% currency is used, is returning towards cash. Similar are the conditions in the US and Europe. The Bank of England is printing more currency as per popular demand. Despite the use of Euro in the European Union, several member countries are still having their own currency.
No such device has so far been developed to make the e-payments full proof and safe.
Just 17% Indians own smartphones and the government of India wants to promote cashless transactions. The government is silent to make a law for political parties, not to accept donations in cash.
Digital Payment Options
RBI launched a new Digital Payment System known as UPI App in April 2016. It is the best and the safest system in the world. It has no transaction cost, transfers funds instantaneously and earns regular bank interest both in the wallet and bank account.
Every bank should have popularized this system, but tragically just 27 Banks have activated it till now. Why is it so?
Besides, the choice to use cashless means or cash is the consumer preference. There should have been no compulsion, while the government is making it mandatory. Nobody should drive the public like cattle. India is a democratic country and here is no place for and dictatorial dictates.
But again nobody knows when the situation would return to the pre-demonetization era.
Endangered Indian Democracy
This effort to change the Indian culture and its economy in a single stretch is impracticable. The people opposing the move are being termed as traitors. The Intolerance is in full swing. Indian democracy is going astray and is slowly becoming an Intolerant totalitarian state like Hindu Taliban.
It reminds of Ingsoc and The Big Brother, still watching you in George Orwell’s “1984”. We should avoid making the principles out of conspiracies.
All Cash is not Black and All Black is not Cash
In England, the banned currency could be changed anytime, even after 5 years. But in India, the currency would cease to have its value after 30th December. It is a breach of trust by RBI and the Government of India. It is against the Fundamental Right of Property. The person coming to the banks is not always the owner of the black money.
Every currency note bears the following statement of RBI Governor,
"I promise to pay the bearer a sum of Rupees such and such amount". It is an unconditional promise not bound by time and place. Hence it is called promissory note.
Setback to the Banking System
After the disintegration of USSR in the nineties, the people lost their bank deposits. Now they have no faith in their financial system and often keep their money in the form of Euros or US $.
The people have lost their faith in the Indian banking system. They are avoiding keeping their money in the banks, as they failed to get their own money when it was badly needed during hospitalization, marriage, daily expenses and other needs. Some have started converting their cash into foreign currency or bitcoins. Due to the currency policies of India and Venezuela, the bitcoin is on $1000 mark again.
The possible inquiry of bank lockers and Benami or pseudonym property has also created panic.
The people avoid keeping the new currency notes of Rs. 2000 denomination for the fear of it being banned some day or it loses color and people are afraid that it may become a white paper.
These fears and loss of faith are harmful to the currency and would adversely affect the economy. It is a complete financial anarchy. The public is being fooled, while the Big Business Houses are getting all the benefits.
Why Demonetization Failed
The black money is generally invested in property or used in the business enterprise, or sent overseas or invested in Import-Export. An importer imports something for $100, gets the bill from the supplier for $150 and gets $50 deposited in the foreign bank. Similarly, the export is undervalued for $50 and the remaining $50 is deposited by the foreign customer in the foreign bank account of the Indian supplier. The so-called surgical strikes on black money will send the Indian money overseas.
The investment in gold has increased the gold import and cash is flowing out of India. The value of US $ has gone up as it has become a favorite currency.
Demonetization would not end the black money, as the higher taxation system generates it. The confiscation of new currency notes proves that merely the color of black money has been changed.
An attack on the source of black money can stop its generation. The demonetization should have been executed by closing the Indian economy from all sides. The open boundaries allowed the black money to escape out of the country. The best option is to reduce the taxes, control the corruption of government machinery, regulate financial boundaries and stop the presence of black money in politics.
It is estimated that more than 15 Lakh crore of the demonized currency has arrived in the banks by 30th December 2016. According to Bloomberg more than 97% of the banned currency in the form of Rs. 1000 and Rs. 500 notes have been deposited in the banks. The RBI has so far no come with the actual figure.
Arvind Pangahria, the Vice Chairman of Policy Commission is of the opinion that the adverse effects of demonetization on the economy would be recovered in the first two quarters of the next financial year 2017-18. He said that the decline in the growth rate in the last quarter 2015-16, i.e., after the demonetization would be recovered in next financial year.
Dr. TCA Anant, the Chief Statistician of Central Statistical Department of Government of India released the first advanced estimates related to the GDP on 6th January 2017. He said that the rates of GDP in 2016-17 could go down to 7.1% from that of 7.6% in 2015-16. The per capita income too would go down to 5.6% from that of 6.2% in the previous financial year.
P. Chidambaram, the former Finance Minister said that the GDP would go down more than the estimates given by the Indian Government. The decrease in the GDP of just about 1% means the loss of 1.5 Lakh Crore. He said that both the and Statistical Department have acknowledged the decrease in GDP due to demonetization.
He further said that "Demonetization was much ado about nothing. It was like the Mountain in Labor in Aesop's Fables. A mountain had gone into labor and was groaning terribly, but in the end, it gave birth to a mouse.' In Classical times this example was cited for a variety of situations like, “a speech which promises much but delivers a little”.
The Prime Minister of India reacted to this statement and said, “We were after that mouse, as it was eating into the system".
In this statement, in lighter the vein the PM has acknowledged the failure of demonetization.
Confessions of RBI- A Dramatic Epilogue
In its annual report of 2016-17 released on 30th August 2017, the Reserve Bank of India officially revealed the figures about the demonetization of 8th November 2017.
These statistics shattered the tall claims made by the Indian Government regarding the successful attack on black money through demonetization.
The RBI said that, the specified bank notes (SBNs), worth Rupees 15.28 Lakh Crores out of total demonetized notes of 15.44 Lakh Crores of in the form of the banned currency notes of the denomination of Rupees 1,000 and Rupees 5,000 has been received as of 30 June 2017.
This figure amounts to 98.7%, while the remaining 1.3% or Rs. 16,000 crores have not come back to the banking system.
The Indian citizens deposited almost the entire currency that was scrapped during demonetization, shows data released by the RBI in its annual report.
At the time of demonetization, the total currency in circulation was Rs 17.97 lakh crore and 86 % of this i.e., Rs 15.44 lakh crore was rendered invalid.
The RBI said that this data was still provisional as only an estimation of SBNs received back is possible until the notes are processed for their numerical accuracy and authenticity subject to future corrections based on the completion of verification process.
RBI’s annual report says that by the end of March 2017,
1. The value of banknotes in circulation declined by 20.2 % over the year to Rs 13.1 lakh crore.
2. Due to the increase in the banknotes of the lower denomination in circulation after demonetization, the volume of banknotes increased by 11.1 %.
3. The share of Rs 500 and above banknotes stood at 73.4 % as compared to 86.4 % before demonetization. Out of which the share of Rs 2,000 banknotes in the total value of banknotes in circulation was 50.2 %.
4. The balance sheet of RBI increased by 1.88 percent in the year ended June 30, 2017.
5. The income of RBI for the year decreased by 23.56 percent.
6. The expenditure of RBI for the year increased by 107.84 percent.
7. The RBI had a surplus of Rs 30,659 crore during the year.
8. The increase on the asset side was due to the increase of 2.70 % in foreign investments and7.45 % in domestic investments and capital contribution to the subsidiaries of the Reserve Bank.
9. The increase on the liability side was mainly due to an increase of 76.96%.in the deposits.
10. The need for more interference due to a surge in liquidity affected the balance sheet of RBI. With an increase in deposits and surge in liquidity, the RBI sucked out this excess liquidity through reverse repo operations. The RBI pays an interest to banks on the amount that they deposit with it through reverse repo.
High expenditure incurred on printing of new notes
The RBI spent Rs 7,965 crore in 2016-17 as compared to Rs 3,420 crore in 2015-16 on the printing of new currency notes.
Report of IMF
The IMF in its revised updates of World Economic Output has reduced the GDP of India for the financial year 2016-17 from 7.6% to 6.6%. It was done due to the temporary adverse effects of demonetization on the Indian economy. Earlier the World Bank reduced the estimates of GDP from 7.6% to 7%. In March 2017, the IMF reduced the GDP of India for the 2016-17 and the next financial year to 1% and 0.4% respectively. The primary reason for this reduction is the cash crunch caused due to demonetization.
In March 2017, the IMF reduced the GDP of India for the 2016-17 and the next financial year to 1% and 0.4% respectively. The primary reason for this reduction is the cash crunch caused due to demonetization.
The IMF reduced the GDP of India for the 2016-17 and the next financial year to 1% and 0.4% respectively. The primary reason for this reduction is the cash crunch caused due to demonetization.
Loss to Indian Economy
But in reality, the GDP came down to 5.7% after demonetization, when the statistics for the previous financial year were released.
The decline of 1% in GDP means 1 lakh Crore. The demonetization caused a loss of 1.9 % GDP i.e., loss from 7.6 % to 5.7%.
By this whimsical decision of demonetization, the gain was just of Rs. 16,000 Crores, while the loss was about 2 lakh Crore, which could get doubled if the loss of small-scale and cottage industries including unemployment and lost working hours are also included.
The epitome of the whole episode of demonetization is A Great Fiasco.
The RBI Press Release of 29th August 2018: The Catastrophe
The RBI disclosed in its annual report of 2017-18 on 29the August 2018, that 99.3% of demonetized currency in the form of RS.500 and RS. 1000 has come back to the banks. Before demonetization the total currency in the form of banned notes in circulation was RS. 15.41 Lakh Crores. Out of which 15.31 Lakh Crores have come back to the banking system. RBI said that only a small amount of RS. 10,720 Crores have not come back.
The RBI said that the counting process of demonetized Specified Bank Notes (SBN) has been completed through High-Speed Currency Verification and processing system.
The RBI has issued new currency notes of RS.500, but the new notes of RS. 1000 have not been issued. Instead of it new currency notes of the demonization of RS. 2000 have been issued.
The RBI said that in SBN the fake currency intercepted in the form of RS. 500 and RS. 1000 was 59.7% and 58.6% respectively.
In comparison to the previous year, the interception of the fake currency in the form of RS.100 increased by 35%. Further, the amount of fake currency in RS.50 denomination increased by 154.3 %.
In 2017-19, the total 9892 fake currency units were intercepted in the form of RS. 500 denominations, while that of RS. 2000 it was 17929 units. The RBI said that in the previous year these figures for RS. 500 and RS. 2000 were 199 and 638 respectively.
The objective of demonetization to check the fake currency also failed.
Total Loss on the Expenditure on Printing of New Currency Notes
1. 2016-17, the Expenditure on the Printing of New Currency Notes After Demonetization
2. 2017-18, Expenditure on the Printing of New Currency Notes After Demonetization
3. Expenditure incurred to calibrate the ATM’s as per the size of new currency notes
4. Expenditure incurred to transport the new currency notes to different banks throughout the country by using the Air force Planes and other means
5. Total Expenditure on Indian Exchequer after Demonetization
6. Demonetized currency or so called black money which did not come back to the banking system
7. Total Loss to the State
Demonetization Has Failed
In 2016-17, the RBI spent RS. 7,965 Crores on account of printing of new notes after demonetization.
In 2017-18, the RBI spent RS. 4,912 Crores on account of printing of new notes after demonetization.
In order to calibrate the ATM’s as per the size of new currency notes, the banks spent more than RS. 500 Crores.
The expenditure incurred to transport the new currency notes to different banks throughout the country by using the Indian Airforce Planes and other means was more than RS. 1,500 Crores.
In this way the total expenditure on Indian Exchequer after the futile exercise of Demonetization was RS. 14,877 Crores.
We can say that the profit to the State was of RS. 10,720 Crores, which did not come back to the banking system and could be considered to be a black money. But the State spent Rs. 14,877 Crores on demonetization. The net loss
The Naxalite activities and terrorism has not ended.
The corruption has not so far been completely eradicated.
In this way, all the 4 objectives for demonetization as laid down by the Prime Minister have failed miserably.
These objective were
1. To stop counterfeiting of the current banknotes.
2. To choke the funding of terrorist activities.
3. To crack down on black money.
4. To check corruption, use of drugs, and smuggling.
Do you think demonetization in India was a right decision
Questions & Answers
© 2016 Sanjay Sharma