One Year of Demonetisation: Pain or Gain? We Explain in 5 Points

A year ago, we got the shock of our lives when we got to know that all the Rs 500 and 1,000 notes in our possession had become worthless.

Some of our friends were about to get married. Other than the shock, we had to grapple with many mundane issue – how to pay to caterers, will bandwallahs come without advance payment, how to buy the lehengas the friends had selected, how will the guests manage? The thought of shaadi ka rang pheeka na ho jaaye used to give us sleepless nights.

But there was nothing we could do, as all the Rs 500 and Rs 1000 notes ceased to have any value following the PM’s Rashtra Ke Naam Sandesh on 8 November 2016.

A year down the line, the verdict on what was done that day remains extremely divided. A section, like the one including the influential voice of former PM Manmohan Singh, termed notebandi a "monumental disaster."

The government's defence, however, has been that the move was intended to bring about a much-needed cleansing of the system.

Did the decision fail miserably? There is no easy answer. But wait, we can at least tell you what the decision did and did not do.

No One-Time Bonanza for the Government

Just a few days after the demonetisation announcement, the government’s law officer told the Supreme Court that of the Rs 16 lakh crore immobilised on 8 November, Rs 10-11 lakh crore was expected to return to the banks.

The rest, a hefty Rs 5-6 lakh crore, the government reckoned, was the amount of black money held in cash and hence would never return. If the script had played out that way, the government would have made a huge one-time gain of at least Rs 5 lakh crore.

However, according to RBI’s preliminary estimates, all notes except a few thousand crore rupees did come back to the system.

Black Money Bye-Bye, But is the Menace Gone?

Demonetisation was touted as an instrument to weed out black money. Kaun sa black? Ill-gotten accumulated wealth or fresh generation kaali kamai?

All that we knew, backed by various reliable studies, was that the proportion of cash in black money overall was never more than 5 percent. So by attacking just the tiny cash portion of it, did we expect the menace of black money to go away?

But here’s a claim to support something done right: The Income Tax (I-T) department has reportedly identified more than 5 lakh ‘suspicious’ accounts with deposits running into several thousand crores.

What ought to follow is the time-consuming process of the enforcement agencies launching a hounding mission to bring all such account-holders to book.

There is bound to be collateral damage, as some innocent people may have to bear the brunt, resulting in potential miscarriages of justice. And what about the ensuing spectre of the raid raj, neutralising the stated goal of ‘minimum government, maximum governance’?

Cash to be Replaced by Plastic Currency

In the midst of the acute currency shortage, the government tried to incentivise digital transactions. There was sharp jump in the volume of digital transactions in the two following months.

However, the pace of growth has slowed down considerably after that initial spurt.

According to a Mint report, the value of digital transactions in May were back at pre-demonetisation level. What is heartening, though, is the expansion of digital infrastructure, making transacting easier for the tech-savvy.

While the overall volume of digital transactions is a fraction of total transactions, the spread of digital infrastructure should be counted as a plus.

Remonetisation Happened Faster than Expected

It was feared that remonetisating the system would take at least seven months. The four currency printing presses have the capacity to print 3 billion notes a month, and the challenge was to replace 21 billion notes in record time.

However, a functional remonetisation (measured as the day when restrictions on withdrawing notes are fully lifted) was achieved in just four months. Equally impressive was the speed with which ATMs all across the country were recalibrated in record time to dispense the notes of new size.

More Money in the Banking System Means New Push for Growth?

One of the arguments given to justify demonetisation was that with everybody rushing to deposit their cash, banks would be flush with funds, pushing interest rates down. Low interest rates mean cheap credit, and that would give a fillip to consumer and industrial demand.

Interest rates have indeed come down – but not because of newly available funds. They have come down because credit growth rate is at a multi-year low. And despite being flush with funds, banks’ health has shown no sign of improvement.

Now, another twist. Banks will be asked to use surplus funds worth Rs 1.35 lakh crore in buying the government’s recapitalisation bonds. In other words, bankon ka paisa phir se banks ke paas. Liabilities ban gaya assets. What an accounting switch! Who cares for fiscal-wiscal discipline anyway.

Did we gain more than we lost? The debate will continue.

Video Editor: Ashutosh Bhardwaj & Vivek Gupta