Demonetisation at ten and the reckoning still owed

Ten years ago, Indians were asked to surrender the use of their own money with just four hours' notice. It was a shock-and-awe operation. At 8.00 pm on 8 November 2016, Prime Minister Narendra Modi announced on television that existing Rs 500 and Rs 1,000 notes would cease to be legal tender at midnight. They represented about 86 per cent of the currency in circulation. Holders could deposit them in banks, but replacement notes were scarce.

The system was not ready. Many ATMs were yet to be recalibrated. The right to spend their own savings had effectively been suspended.

The hardship was immediate: long queues, strict withdrawal limits and a scarcity of notes. Workers lost wages while waiting outside banks. Small businesses struggled to pay suppliers and employees. Farmers needed cash for inputs and labour. A Rs 2,000 note, when available, was often difficult to use because nobody had change. Bank employees worked late into the night and for several weeks to administer a decision for which the system was inadequately prepared.

Yet many people enduring the suffering supported the exercise. They believed that somewhere, wealthy tax evaders were suffering far greater losses. Their inconvenience seemed a reasonable contribution to a national campaign against black money. Public trust in the prime minister's decision was very high.

Ten years later, however, we still do not have an honest accounting of what their sacrifice accomplished.

The original announcement identified black money, corruption, counterfeit currency and terrorism as its targets. Subsequently, however, the objectives kept shifting to greater tax compliance, formalisation and digital payments. Each offered a different standard of success. This expanding and changing list made it easier to claim achievement without establishing whether the original promises had been fulfilled.

The most dramatic expectation was that large hoards of illicit cash would become worthless because their owners would dare not deposit them.

In August 2018, the RBI's final accounting showed that 99.3 per cent of the withdrawn currency had returned to the banking system.

On 1 July 2017, in his address to chartered accountants on the foundation day of their institute, the prime minister pointedly asked whether their intense work after demonetisation had served the nation or their clients. He admonished CAs for providing professional assistance to suspicious companies to recycle illegal cash. This raises an obvious question: if holders of unaccounted cash could find intermediaries to circumvent the restrictions, what justified imposing such hardship on the entire country?

Some of the returned cash did trigger tax investigations. But the anticipated destruction of large hoards of illicit cash had plainly failed to materialise. How much additional tax was collected and how much black money was ultimately recovered? Did the gains justify the nationwide disruption?

Confiscating cash alone was never going to work anyway. The finance ministry's own 2012 white paper showed that cash seized during searches amounted to only about 4 to 7 per cent of the undisclosed income admitted in those cases. The government's own enforcement experience therefore warned against equating illicit wealth with cash. Such wealth could be held in benami property, gold, business assets and overseas holdings. Cancelling banknotes would leave those assets untouched.

If the objective was simply to discontinue high-denomination notes, there was another way. In May 2016, the European Central Bank announced that it would stop issuing €500 notes. Existing notes would remain valid and could be exchanged indefinitely.

Kenneth Rogoff's book The Curse of Cash, published the same year, advocated the gradual withdrawal of large-denomination notes, with safeguards for poorer households. India, instead, withdrew two denominations overnight and introduced an even higher one. That defied logic. In 2023, the RBI withdrew Rs 2,000 notes from circulation in a quiet and non-disruptive exercise, while retaining their legal-tender status.

Digital payments have since grown enormously, with the monthly run rate now exceeding 25 billion UPI transactions valued at more than Rs 31 trillion. Cheap data, smartphones, convenient applications, QR codes and free UPI transactions for users have helped drive that success — not demonetisation alone. Cash in circulation, now at Rs 43 trillion, has more than doubled since demonetisation. Clearly, cash and digital payments are both necessary in India's developing economy.

What about the damage to livelihoods? The Economic Survey acknowledged that official GDP figures could understate losses because informal economic activity was difficult to measure. Agriculture and small businesses were badly hit. But neither official national statistics nor subsequent economic recovery can fully capture the impact of a closed workshop, interrupted education, distress borrowing or savings exhausted during unemployment. A temporary disruption can leave a household permanently poorer.

The courts offered little relief. In January 2023, the Supreme Court upheld demonetisation by a four-to-one majority. It subsequently disposed of individual petitions seeking the exchange of old notes, acknowledging potentially genuine grievances but directing petitioners back to the government. These orders provided no monetary relief.

What remains missing is a comprehensive retrospective balance sheet connecting measurable benefits with the economic and social costs. Investigations announced, suspicious accounts identified and companies struck off are merely intermediate actions, not proof of the exercise's overall success.

An independent review should also ask whether less disruptive enforcement measures could have secured the same gains. Citizens were entitled to that comparison before being asked to bear such an extraordinary burden.

The political calculation also deserves attention. Demonetisation preceded the Uttar Pradesh election, and contemporary reporting described how cash-dependent regional parties faced difficulties. Then finance minister Arun Jaitley later acknowledged that the government had been certain the move would help politically. That does not prove that disabling political rivals was its sole purpose. Nor could the subsequent electoral victory settle the question of its economic merits.

More troubling was the inconsistency over transparency. Citizens were urged to accept scrutiny of their money. But under the electoral-bonds scheme announced by the government in 2017, political donations were kept particularly opaque by law. The Supreme Court struck down the scheme in 2024.

Demonetisation has now entered the vocabulary of political criticism beyond monetary policy. Shashi Tharoor called the proposed delimitation 'political demonetisation'. Mamata Banerjee compared the SIR exercise with' notebandi', calling it 'votebandi'. The exercises are different, but the analogy expresses a recognisable fear: decisions pushed through hurriedly, with ordinary people left to bear the burden of adjustment and proof.

That is the lasting lesson. Preparation, independent scrutiny and clear objectives protect citizens from avoidable harm. When policy fails, changing the justification, retreating without explanation or waiting for public attention to move elsewhere cannot discharge the obligation to account.

Looking back, is this an episode India should be proud of? There is little reason for pride. People's trust was met with disruption whose full costs remain unreckoned and whose promised benefits have never received a convincing, consolidated accounting. Indians rebuilt their livelihoods and moved on. Their resilience cannot absolve the government. Ten years later, a white paper and a public reckoning remain overdue.

Ajit Ranade is a noted economist. More of his writing here

Article courtesy: The Billion Press