Demonetization is a regular process in any country, when its government wants to change or replace the currency with new alternatives. However, if the government fails to take proper measures to implement the pros and cons, it may become a nightmare for the whole population, country and finally for the economy.
Generally, demonetization is implemented with careful planning. But, it can also become a nightmare for all. 8th November 2016 is one of the most striking demonetization efforts in history. India took the sudden decision to wipe out black money from the economy. But, instead of wiping out black money, the government wiped out businesses and total demand and supply chains.
There are many incidents that happened because of the sudden declaration of the illegal tender. This was because it was imposed by the government within a very short span of time. It did not even give people time to breath and make arrangements to purchase essential household items. The sudden move made people stand in queues for long hours to simply get the day to day amount required. The ATM machines dried up within a few minutes because the cash flow in these machines had been totally disrupted because of the non-availability of sufficient currency notes of Rs. 100 or 50 denomination.
The currency notes of Rs. 500 and Rs. 1000 had made up 86% of the total currency in circulation at the time of demonetization i.e. 8th November 2016. The RBI data base reveals that Rs 17,54,000 crore worth of notes were in circulation. Of this Rs 500 notes constituted almost 45% of the currency in circulation while 39% of the notes were of the Rs 1,000 denomination. In value term, Rs, 1000 note had almost Rs 6,32,600 crore value in circulation. It means that following the decision, only about 14 % value of money remained available to the public for cash flow in circulation. Almost ₹15.30 lakh crore (15.3 trillion) was made useless and that currency return to the banks.
The sudden move disrupted the whole economy because no cash was available with the public to spend for even day to day essentials. The government introduced new currency note of Rs. 2000, for which no fractional small value currency note was available. It made the situation especially pathetic for small vendors like tea shops, taxi, vegetable vendors, etc. who waited for smaller value currency.
Now the question is, what is the role of government when it comes to the welfare of citizens. It was not, of course, a wise decision that benefited a large population of the country. The decision of demonetization made people suffer for want of cash when they needed for making payments. All people like businessmen, small vendors, and service providers waited for payments from clients, and customers, who then were unable to make available or pay the bills.
The citizens have every right to their livelihoods. The prolonged cash shortage made them motionless. Many died due to the non availability of cash to pay health bills. Some also died while standing in queue. Does it mean that demonetization was successful? Certainly, it was not a wise decision when people were made to suffer for it.
Another question is, why did the government take this decision suddenly? The government has given an explanation that it was aimed to wipe out black money from economy.
Then, question is: Did the government wipe out black money?
This is a big question which has still not been answered by the government. The RBI report of 2018 revealed that approximately 99.3% of the demonetized banknotes, or ₹15.30 lakh crore (15.3 trillion) of the ₹15.41 lakh crore return to the banking system. Then, can we say that remaining currency notes that did not return to system were black money? Or can we say that deposited currency notes also included black money/ counterfeit currency etc.?
Really, no one knows, exactly what happened to the black money and how much the government collected or traced from the people. The government failed to reveal the reality of demonetization. However, the government made people suffer and compelled businesses to face the greatest of suffering for next few months until the cash flow came to the pre-demonetization level. In fact, it is a “failed policy”.
Increase in Inequality
Demonetization had led to an increase in inequality in India. There is a huge inequality between those dependent on the informal sector, about the workforce and the workforce outside of the informal sector. Demonetization was implemented to curb black money and increase digital payments but it ended up creating a scarcity of credit in the system.
Tax evasion and flow of black money in the system are reversing the initial impact of the noteban.
Japan has the highest cash per capita, way more than India. The cash in circulation, relative to the gross domestic product (GDP) for India was 10 per cent, whereas in Japan it is 60 per cent. That is not black money; that is not corruption.
Demonetization has devastated informal sector of economy. It has pushed farmers, labourers into the huge trap of debt and forced a few of them to commit suicide. Therefore, it is the poorest in the country that have suffered the most from this demonetization.
Dr. Nitin Raut is the Maharashtra Energy Minister and the Working President of Congress Party. All views expressed in this article are his own.