On November 8, 2016, Prime Minister Narendra Modi appeared on national television and declared that all Rs 500, Rs 1,000 high value notes will become invalid by midnight. The announcement aimed at flushing out black money, resulted in nearly 86 percent of the currency in circulation becoming invalid by midnight, with no provision for adequate replenishment.
All economic agents were given a specific amount of time to deposit their old notes with banks and exchange them for new ones. This put a lot of strain on the banking system.
The demonetisation of high-denomination currency notes prompted a months-long nightmare for citizens. Long lines formed outside banks and ATMs to exchange blacklisted currency notes for
new ones. This situation persisted even after the deadline for depositing old notes had passed on December 30, 2016.
For months, economic growth was severely hampered. What the ruling party thought would be a brilliant move ended up being a disaster.
Today, November 8, 2021, marks the fifth anniversary of India's demonetisation. During this time, the economy has experienced several highs and lows.
The 'Shudhikaran' (purifying) of India
The Prime Minister called the demonetisation a "mahayagna" in the "fight against corruption, black money, fake notes, and terrorism," and urged every citizen to take
part in the "Imandari ka Utsav".
PM Modi claimed that this was a movement aimed at "purifying" the country.
The primary goal of demonetisation was to eliminate black money. But, in reality, what has happened?
According to RBI data, almost all of the money that was invalidated (more than 99%) ended up in the banking system. Notes worth Rs 15.31 lakh crore have been returned out of the Rs 15.41
lakh crore in invalidated notes.
In February 2019, then-finance minister Piyush Goyal told Parliament that all anti-black money measures, including demonetisation, had recovered Rs 1.3 lakh crore in black money. It should
be noted that the government had anticipated that the demonetisation exercise alone would result in the neutralisation of at least Rs 3-4 lakh crore in black money outside the banking system. As a result, data suggests that
demonetization failed to uncover black money in the system.
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Eradication of Fake Notes?
The second major target of the Modi government's demonetisation was fake or counterfeit currency notes. 6.32 lakh counterfeit currency were seized across the country in 2016.
According to RBI data, a total of 18.87 lakh pieces of fake notes were seized across the country over the next four years. In 2019-20, the Reserve Bank detected 4.6 percent of the total Fake Indian Currency Notes (FICNs) detected in the banking sector, while other banks detected 95.4 percent.
The Rs 100 denomination had the most fake currency notes seized in the post-demonetisation years, with 1.7 lakh pieces in 2019-20, 2.2 lakhs in 2018-19, and 2.4 lakh pieces in 2017-18.
In the Mahatma Gandhi New Series, counterfeit notes detected in the denominations of Rs 10, Rs 50, Rs 200, and Rs 500 increased by 144.6 percent, 28.7%, 151.2 percent, and 37.5 percent,
respectively, compared to the previous year. Even now, counterfeit notes are being circulated.
Coincidental promotion of Cashless currency
People were struggling to make payments for their day-to-day purchases in the immediate aftermath of demonetisation due to a massive liquidity crunch. Signing up for digital payment wallet companies was a mad rush.
The government came up with a slew of other incentives to encourage digital payments, including no fees for using cards and free shipping on most government payments. Vendor user fees were
also waived or reduced.
In the last four years, innovations such as UPI for payments, the use of QR codes, and the proliferation of high-quality fintech companies have given a big boost to the adoption of digital
payments. During the COVID-19 pandemic, this transformation was accelerated.
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In the country, there is a strong push to expand digital payments. Although more than 80% of payments in the volume are still made in cash, India is rapidly adopting digital payments as
a way of life.
A never-ending debate
The government has claimed that demonetization has had a positive impact on the economy. However, not all economists share this viewpoint.
Demonetisation, according to some, broke the back of the rural economy, which was dominated by cash and disrupted supply chains. The impact of the note ban on the economy was significant.
Several studies claim that demonetisation has harmed the Indian economy. The study, titled "Cash and the Economy: Evidence from India's Demonetisation," contended that demonetisation
slowed India's economic growth and resulted in a 2-3 per cent job loss in the quarter following the note ban. In November and December 2016, India's economic activity fell by 2.2%, according to the study.
Where the debate over the effectiveness of demonetization is still raging, leftists have lashed out at the government over the state of the economy.
"Economy into a tailspin, the poorest hurt. Informal sector decimated. No black money recovered, but the rich got richer. Cash in the economy is the highest ever now! This govt must bear responsibility for pushing India downhill, just for one man's whim," says CPI(M) general secretary Sitaram Yechury.
Meanwhile, majority of Indian citizens slam the Modi government labelling the day of launch of demonetisation as “Black Day in Indian Economy”. After five years, #Demonetisation and #Black_Day_Indian_Economy trends on Twitter indicating the catastrophic decision of the Modi government continues to clench country’s backbone.