By Anusha Nagavarupu
In a surprise move by the Indian Government, on 8th November 2016, old 500 and 1000 bank notes were canceled. This move of the Government left hundreds of notes worthless. Evading terrorism and its facilitation was one of the primary motives behind the demonetization. The notes accounted for over 86% of the country’s circulating cash. As this initiative was implemented, thousands of people were left helpless as a result of prolonged cash shortage and public unrest. Out of the total demonetized figure of INR 15.4 trillion, INR 14.97 trillion was deposited back into the banks. There was also a heavy backlash from opposition parties regarding the move. The poor planning and the sudden timing of the plan were also heavily criticized.
As far as the economic impact of the policy is concerned, following the announcement, the indices of NIFTY 50 stocks and BSE SENSEX dropped by almost 6% along with various other economic factors which have been discussed later in detail. The move also affected India’s GDP and industrial production. In this paper, we will discuss the primary motives and benefits of this policy as well as its impact on the socio-economic scenario of India and her people along with recommendations for the future. Although the currency notes were no longer to be tender, they could still be deposited in banks over a limited period of time. Another reason for this move was the need to tackle tax evasion and corruption, associated with cash that was not accounted for.
Demonetisation is the act of shedding a currency unit of its status as legal tender. It is essential in situations where there is a change in national currency. The old notes must be replaced with a new currency. However, this incident was not the first time India witnessed demonetization. In 1946, Rs 1000, 5000 and 10000 notes were removed from circulation. The notes were then reintroduced in 1954. In 1977, the Wanchoo committee recommended demonetization as a measure to uncover and combat the spread of black money. But since the announcement was public, the black money was easily disposed of and those hoarding it were able to rid themselves of it.
After the announcement by the Narendra Modi the governor of the Reserve Bank of India (RBI), Urjit Patel made a press release with details on the procedure for exchanging the 500 and 1000 rupee notes that are currently in circulation. The following were the relevant announcements:
Citizens will have until December 30, 2016, to tender the discontinued banknotes at any office of the RBI or any bank branch and credit the value into their respective bank accounts.
For immediate cash needs, the discontinued banknotes of value up to ₹4000 per person can be exchanged for the new banknotes over the counter of bank branches from 10 November 2016 by furnishing valid ID proof.
All ATMs will remain closed from midnight on 8 November 2016. The ATMs will resume functioning from 11 November 2016 upon their recalibration to dispense banknotes of only 50 and 100 rupee denominations
. Banks have been advised to provide all cash withdrawal transactions at their ATMs free of cost to their customers till 30 December 2016. Cash withdrawals from ATMs will be restricted to ₹2000 per day per card up to 18 November 2016 and the limits will be raised to ₹4000 per day per card from 19 November 2016.
All banks will remain closed to the public on 9 November 2016.
Another example of demonetization was the Coinage Act of 1873. It demonetized silver as the legal tender of the United States; thereby adopting the Gold standard. The two-cent piece, three-cent piece, and half dime were discontinued. This very move was what led to the five-year economic depression. The Bland Allison Act then remonetized silver as legal tender in 1878.
DEMONETIZATION AND ITS FAILURE
There are those who criticize the move and those who support it. An RBI Annual Report found that 99.3% of the money withdrawn from circulation had been returned to banks, indicating that there was either lesser money that was black than one thought, or that money laundering schemes were in play. Several reports suggest that the very intention, for which thousands of citizens were reduced to the roads, has not been fulfilled. The demonetization supposedly wiped at least 1% from the country’s GDP and cost at least 1.5m jobs, failing to wipe significant hordes of unaccounted wealth from the Indian economy- a key rationale for the move.
And while digital transactions have grown, the RBI found that counterfeiters have resorted to recreating smaller notes, thereby being able to replication the new 500 and 2000 rupee notes. While this move may have helped in injecting black money stashed in the houses of many into the banking system and also helped with enabling digitization, the price paid for the same, however, can be said to be a heavy one. When the move was announced, people trying to exchange their banknotes were made to stand in lengthy queues which caused many deaths owing to rushes and inconvenience- something one wouldn’t imagine as a price to pay for the Government’s new policy. The announcement not only impacted the business economy but the agricultural side as well. Farmers who depend upon cash to buy seeds and fertilizers remained the most affected faction. Adequate cash wasn’t even supplied to small branches of banks which further inconvenienced farmers. They couldn’t get their crop loans disbursed and further led to weak agricultural production.
Another failure in this regard was to make India a ‘cashless society’. The RBI’s second annual report since demonetization is evidence as to how the move was a grand failure. The country’s banks reportedly detected a 480% jump in suspicious transactions post demonetization. While demonetization was to help detect fake currency, it is noteworthy in this regard that there was an amount of 400 crores in the fake currency that was in the economy.
The banks, including those in the private, public and cooperative sectors, and other financial institutions collectively generated 400 percent more suspicious transaction reports (STRs) at over 4.73 lakh such dossiers during 2016-17. A noteworthy growth was also seen in the number of counterfeit currency reports (CCRs) which increased from more than 4.10 lakh in 2015-16 to over 7.33 lakh in 2016-17, which may also be attributed to the demonetization exercise The Reserve Bank reports a huge jump in fake notes of Rs.2000 notes which were found after demonetization. The bank has also claimed that the ‘cashless’ objective has not been met, owing to the fact that the amount of cash with the public has reached a record high.
Just after the demonetization move, a former minister spent Rs.500 crore on his daughter’s wedding. A question that needs to be asked in this regard, is what was the point of this move, really? A move that brought temporary money at a standstill and which continues to be circulated even now, and which has had nothing less than a destructive impact on the society altogether, isn’t a move towards development in any way or form, whatsoever. On the contrary, people have only found more creative ways to work around the temporary setback. Referring to the earlier former minister’s expense on his daughter’s marriage, one may say that demonetization did nothing to impact the ‘big fish.’ It’s the farmers and the people from the lower strata who are struggling at the end of the day, owing to the fact that they are used to a cash-based transaction system, due to the fact that they simply don’t have access to the ‘digital’ knowledge of things. Demonetization has failed in its objectives. When it was first introduced, it seemed like a masterstroke, like something that was going to set the economy free of all shackles, but what it seems like is nothing more than a mere miscalculation. An ill-formulated scheme, the demonetization plan was a poorly implemented one, lacking execution and cost-benefit analysis.