Demonetisation: Five years on, cash still the mainstay of economy; graft and black money continue to thrive

RBI numbers reveal that currency worth Rs. 28.3 lakh crore was in circulation on October 8, 2021, a 57.48 per cent or Rs. 10.33 lakh crore jump compared to November 8, 2016

People wait in unending queues outside a bank to withdraw some cash post-demonetisation in 2016
People wait in unending queues outside a bank to withdraw some cash post-demonetisation in 2016

Aditya Anand

Monday, November 8, 2021 marks five years since PM Narendra Modi suddenly announced that existing currency in the denomination of Rs. 500 and Rs. 1,000 would cease to be legal tender, a move known as Demonetisation, which was supposedly aimed at curbing circulation of black money and fake currency, corruption and terror funding.

Going by Reserve Bank of India (RBI) data and as per experts, however, it’s clear that nothing of that sort happened. Datapoints show that the whole exercise was futile since corruption, black money, fake currency and terror funding are all still around, if in different shapes and sizes.

Over time, the government has stopped printing of the new Rs. 2,000 notes introduced at the time. Increasing black money and recovery of the high denomination notes during multiple tax raids have been cited as reasons behind it. Data from the RBI also shows that the Bharatiya Reserve Bank Note Mudran Private Ltd (BRBNMPL) and Security Printing and Minting Corporation of India Ltd (SPMCIL) have not printed any Rs. 2000 notes during the financial years 2019-20 and 2020-21.

At the same time, the Pradhan Mantri Garib Kalyan Yojana launched by the Centre, expecting holders of scheduled bank notes to declare black money, gathered less than Rs. 5,000 crore, falling well below expectations.

It is perhaps this that prompted former Finance Secretary Subhash Garg to say, “Slowly, maybe over the next 5 or 10 years, the Rs. 2000 note would be effectively demonetised if not formally demonetised.”

Demonetisation failing on its much-touted promises can be seen in the RBI annual data. In financial year 2020-21, there were currency notes worth more than Rs. 28 trillion in circulation. The data shows that the value and volume of currency in circulation increased by 16.8 per cent and 7.2 per cent, respectively, as against an increase of 14.7 per cent and 6.6 per cent, respectively, witnessed during 2019-20.

In value terms, the share of Rs 500 and Rs 2,000 currency notes together accounted for 85.7 per cent of the total value of currency notes in circulation as on March 31, 2021, as against 83.4 per cent as on March 31, 2020.

Moreover, a total of 2,08,625 pieces of counterfeit currency notes were detected during 2020-21, as compared to 2,96,695 pieces during 2019-20, and 3,17,384 during 20218-19.

Announced by PM Modi in a widely-televised address at 8 p.m. on November 8, 2021, Demonetisation left people shocked, mainly because of the secrecy that surrounded the announcement declaring the largest denomination of notes that were in circulation then as pieces of worthless paper from midnight that very day.

Memories of the weeks that followed are likely to be indelible for most people, who were forced to line up outside banks to exchange their old Rs. 500 and Rs. 1000 notes amid ever changing rules of the game, even as ATM cash management service companies struggled to recalibrate their machines to accept and disburse the new, smaller sized currency notes.

Almost as an afterthought, the Centre had announced that Demonetisation was set to give a big push to the use of digital currency in a ‘cash-less’ economy. With the Rs. 500 and Rs. 1000 notes out of the system and the new ones difficult to get, e-wallets and digital payments got a huge boost.

For starters, let’s examine how Demonetisation performed in enabling a less-cash, if not cashless, economy. The latest RBI numbers reveal that the total value of currency notes in the hands of people stood at Rs. 28.3 lakh crore on October 8, 2021. When compared to November 8, 2016, this is a 57.48 per cent increase or a Rs. 10.33 lakh crore jump in the circulation of currency. Media reports have also suggested that currency notes with people have gone up by 211 per cent from the sum of Rs. 9.11 lakh crore recorded on November 25, 2016.

Madan Sabnavis, chief economist at CARE Ratings, opines that through Demonetisation, the government might have set its eye on unplanned objectives as against the planned ones.

“The whole idea was to get rid of black money and look at counterfeit money. The government gave different kinds of aspirations when demonetisation was introduced. Subsequently, it changed tack and said that it wanted to bring about digitalization of the economy. Now, if we're looking at the first part of it, I think it has been proven that we really didn't have anything significant in terms of black money or competent money,” he says.

Sabnavis is of the view that people prefer currency and they're not going to switch to digital, though the evolution of the latter has definitely helped. “To me, it is wrong for anybody to say that people should not hold cash. We are a democratic country, where people should have the option to use cash or digital transactions. If you want me to move to digital payments, then you give me incentives, offer people a discount rather than force them,” he says.

RBI’s six-city survey on retail payment habits released in April 2021 too reveals that cash remains the preferred mode of payment and for receiving money for general spends. Cash was seen to be used generally for small value transactions up to Rs 500.

The RBI says that it is assumed that having high cash in circulation relative to the GDP indicates that cash is highly preferred as a payment instrument. Based on this assumption, the RBI opines that India continues to have a strong bias for cash payments.

Sabnavis points out that one cannot assume that all kinds of black money is held in the form of cash alone. “Black money has different forms. So therefore, though the Centre’s stated goal of Demonetisation was that we want to get black money out, nothing much came of it, which means that black money doesn't reside in the form of cash alone. One lesson is that cash is still the king and people still want to hold on to cash because people have more faith in it,” he says.

“Looking back, Demonetisation to my mind had a limited objective. It has been given a bigger life than what it deserves,” says Subhash Garg, who succeeded incumbent RBI Governor Shaktikanta Das as Finance Secretary in July 2017.

Garg, who was in office on the first anniversary of Demonetisation, however disagrees with experts term the exercise as a colossal failure. Though he agrees that it did lead to inconvenience for millions, Garg terms the execution of such a large exercise carried out in such a small period as a “good administrative feat”.

“If this was a different kind of a thing, it could have been better planned. Secrecy was important here. But after about 6-9 months when the currency was re-monetised and adequate currency had come into effect, the impact on the economy as far as the currency goes was practically over,” he mentions.

The former Union Finance Secretary opined that Demonetisation had a certain impact on the economy whose effects are visible even today. He says he believes that the informal, inefficient and relatively poorer businesses have been replaced by more formal, organised and tax compliant businesses.

Deven Choksey, managing director, K R Choksey Investment Managers opined that Demonetisation gave a big push to digital currency or digital payments. “Demonetisation was just a ‘cog in the wheel’ in the larger scheme of things that requires further steps of reforms to be initiated,” he said, adding that framing of stringent laws was necessary to deal with corruption.

As things stand post-Demonetisation, however, the RBI’s Annual Report 2021 only talks of the reforms of automation so as to generate “economies of scale, make the currency management function more efficient and enhance the objective of the clean note policy of the Reserve Bank of India for public use.”

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