Even as Covid-19 pandemic continues to remain a dominating issue confronting us on the health front with signs of a third wave emerging across the country, it was unusual to find 5th anniversary of demonetization (DeMo) igniting debate among politicians, economists and other experts to revisit and measure its impact.
There are certain interesting facts which have emerged since November 8, 2016 when Prime Minister Narendra Modi in a most surprising television broadcast played a midnight stroke in the shape of demonetization (DeMo) of Rs.500 & Rs.1000 currency notes ‘to clean the economy of the black money and fake currency’.
Revisiting the ghost of demonetization (DeMo) at a time when we are fighting a war against the deadly virus, which has already claimed millions of lives across the globe, may not sound topical. But the kind of impact the virus has made on all sectors of the economy makes a sense to revisit and debate the impact of the demonetization. In fact, with the outbreak of coronavirus, the experts were quick to pick unprecedented mass migration of the general public towards digital platforms for conducting electronic transactions as one of the major positives of the pandemic.
It’s here the coronavirus outbreak finally accomplished what the demonetization failed to achieve five years ago. Notably, amid heavy hammering of criticism against making the high value notes invalid, the prime minister in the later stage of the demonetization (DeMo) listed it as an act to encourage people to move toward digital commerce.
Before conducting a post-mortem of the five years of demonetization, let me share an embarrassing situation which I faced at a foreign bank when demonetization -2016 was just five months old.
I am recalling those nervous moments, which I faced in March 2017 when I was loudly told that “we don’t exchange Indian currency”. Actually, I presented myself before a ‘Teller’ at a United Arab Emirates (UAE) Bank branch after waiting in a queue for about half an hour to seek exchange of my currency (INR).
Even as I tried to convince the bank official that the banknotes presented for exchange were not the one declared invalid by the government of India, he quoted the instructions of his top management not to accept any denomination of the INR. The blunt refusal of the ‘Teller’ at the bank branch in the presence of a good number of customers was embarrassing even though my currency in INR was genuine. Precisely, my currency ‘embarrassed’ me on that occasion for none of my fault.
However, the story didn’t end here. There were private currency exchange houses (other than banks) in UAE who were exchanging INR without any questioning. But they used to offer the exchange facility at a lower rate than the market rate.
Now coming to the present autopsy of the demonetization, the report reveals that cash continues to remain king, despite surge in digital transactions. Interestingly the demonetization, as per the RBI data, has undoubtedly triggered the opposite effect of what it was meant to do. In the year 2015-16 (prior to demonetization), about 2.7 billion transactions involving over Rs 4.48 lakh crore were recorded. While in the year of demonetization (2016-17), the volume doubled to over 5.4 billion transactions involving Rs 7.4 lakh crore, a 65 per cent growth. In 2017-18, transactions worth Rs 10.6 lakh crore were recorded, a growth of 43 per cent. In 2018-19, card transactions grew 13 per cent to Rs 11.96 lakh crore, while in 2019-20 it went up to Rs 14.34 lakh crore.
Notably, the currency in circulation in the last five years since November 2016 has doubled, which puts a huge question mark on the demonetization, which was pushed as an act of curbing corruption and promoting digital transactions.
Now, let me share some interesting facts, contained in a RBI data, about the cash in circulation. During the years between 2011-12 and 2015-16, cash in circulation increased at an average rate of 11-12% each year. In the year of demonetization (2016-17), it dropped by 20 per cent compared to the preceding financial year. However, in the succeeding financial year (2017-18) the cash in circulation grew by 39%. In the FY 2018-19 and FY 2020-21, an average increase of 15 per cent was observed.
Just a few days back, India’s cash-to-GDP ratio in 2020-21, which shows the currency in circulation as a proportion of the country’s GDP, was reported at an alarming 14.45% - the highest for India in the last decade. It’s even higher than many other leading countries where it’s reported to be in the range of less than 5%.
In the backdrop of the given data, the demonetization of high value notes will continue to face criticism and will be remembered as a less fascinating act and the most terrifying economic experiment. Here, let me reproduce a story which I had narrated in one of my columns published some time back. It’s a story of the renovation of the economy by Sweden ‘shaping up to be the first country in the world to plunge its citizens into a cashless society.’
As the debate on demonetization of 500 and 1000 rupees currency notes is seeing no end even after 5 years of the operation, it makes sense here to share Sweden’s economic experiments towards establishing a cashless society. The country started the journey towards a cashless economy after many years. Today digital payments are accepted everywhere - be it a bus ride, buying newspapers or a chocolate.
Using too much cash is as good as a crime in Sweden. This is the country where banks call the police if they spot any of their customers using too much cash. There is a belief that if you have to pay in cash, something is wrong. Notably, Swedish banks have started removing ATMs especially from rural pockets to force people to migrate to digital payment systems. Here the people have to keep the money in the bank and pay for it. They cannot withdraw cash and cash transactions are refused by merchant establishments with legal backing. Specifically, Swedish people can’t hide their money.
Now think of a similar situation engulfing India after the demonetization process which was slapped as a surprise and the citizens were not given any time to readjust their cash holdings on hand. It described the final war on black money, counterfeit currencies and terror funding. If we look at these issues globally, we find the US as the worst hit country on this front and the US dollar the most counterfeited currency in the world. Even the share of black money held by individuals and companies based in the US contributes significantly in the generation of black money. All this happens there despite the US having the world’s biggest digital platform connecting its economies.
Here in India the debate continues to raise questions about the level of success the government has achieved in tracking down black money and flushing fake currency in the country? This continues to be an unanswered question so far. However, as rightly pointed out by the experts, the outbreak of the coronavirus pandemic has played a crucial role to push people towards digital transactions, which the demonetization failed to do.
Meanwhile, let’s remember that renovation of the economy through demonetization and promotion of digital payment platforms has not helped to eradicate the menace of black money and fake currency even in most developed nations. Debate on demonetization should end now. Focus should be to pick up corona-induced opportunities, re-align the economic landscape in line with the fast changing times for the welfare of the general public at large. What people in the country urgently need is a sound platform where jobs are guaranteed for a dependable source of income.
(The views are of the author & not the Institution he works for)
Disclaimer: The views and opinions expressed in this article are the personal opinions of the author. The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.