Demonetisation Was Some Gain, With a Lot of Pain

The demonetization of high-denomination currency notes on November 8, 2016, created a

nightmare for citizens that lasted several months. Long queues formed outside the banks
and ATMs to obtain swap denotified currency notes for new ones so that life could
continue. This situation persisted even beyond December 30, 2016, the last day for
depositing old notes. Economic activity was severely dented for months. What the ruling
party thought was a masterstroke turned out to be a disaster. The sudden demonetization
was premised on the idea that “black means cash”.
Policymakers believed that surprise and secrecy were necessary to catch black-money
hoarders off guard to prevent them from getting rid of their illegal funds over the next four
hours. However, crowds were seen buying jewelry and property. Some black money got
converted into assets that could be monetized later on.
The wealth is held in a variety of forms like, in undervalued inventory or balances held in tax
havens abroad. A return is expected from this wealth. So, cash, on which there is no return,
would be a tiny amount – 1% of the black wealth. Thus, if demonetization managed to
demobilize black cash, only 1% of the black wealth would have been eliminated.
Converting old currency to new notes proved to be easy, given the prevailing corruption.
Some bankers were caught helping their rich clients do this. There was a 30% charge for
this. As a result, new black incomes got generated. Businesses showed a cash in hand to
convert the old currency into new notes. Many such strategies were used for conversion.
The issue of new Rs 2,000 currency notes made it easier to hold black money.
In brief, demonetization neither eliminated black money nor stopped black income from
being generated.
Prime Minister Narendra Modi’s speech that night set out three goals: rooting out black
money, eliminating counterfeit currency, and ending the financing of terrorism. They were
laudable goals, but demonetization had little to do with any of them.
Within days, the government realized its mistake and changed the goalpost. It argued that
the move would make the economy “cashless”. This author pointed out then that becoming
cashless would take a long time. The next day the goal became a “less-cash economy”.
Demonetisation was an ill-advised step that did not achieve any of its goals, even after the
goalposts were shifted. But it damaged the economy no end, especially the unorganized
sector. The ruling party understood this and did not showcase it as an achievement in the
subsequent elections.