If I have to point out the single most harmful decision of the government of India in the last 75 years of independence -without any second thought, without any time to think it would be Demonetisation. It was the doomsday decision. In this answer, I would be borrowing parts of my answers written three years back in 2019. In 2016 when it was implemented I was traveling from Bhopal to Jabalpur. I told my colleague who was traveling with me that it was the worst-ever decision taken by any government. What horrified me was that there was no specific plan to tackle what would follow. My next reaction was that the government should have announced an amnesty & voluntary disclosure scheme with a moratorium on such deposits. Which the government incidentally came up with after two weeks or so. Just think about the pathetic level of understanding of the economic think tank. Unfortunately in those days, I was not part of any social media platform. So I can not show any testimony. It’s up to the viewers to trust my word or not.
It was during this period I was extensively connected to the banking fraternity starting from the district cooperative banks to RBI. I was also in close touch with SPM Hoshangabad which manufactures currency paper. I was also in touch with BNP Dewas which was entrusted with the printing of the Rs.2000/- currency notes and later Rs.500/- notes. Possibly I could be among those very few people who would have dealt with the entire spectrum of the banking fraternity in a crisis time like this. I saw the plight of people in the entire chain as well as the plight of the common people. At BNP Dewas, the Indian army contingent was deployed for packing, loading, and forwarding currency note consignment working around the clock. Staff was working for up to 18 hours inclusive of Sundays. because there was an acute shortage of the new currency. There was a shortage of currency paper, as well as printing ink. I had the opportunity to speak to one of the technical committee members who went abroad to source currency paper worth around 3000 crores. In April 2017 I got posted in Mumbai where I had to opportunity to interact (on a private note) with the RBI policy-making body during a few visits to RBI HQ. I visited the high-security RBI HQ to discuss what else could be added to the existing security arrangement and make it ready for any kind of surprises.
It took four months to get the situation under control. Initially, the district co-operatives banks were not entitled to exchange currency, but they accepted old notes since the villagers had no other accounts. There was no clarity on how they would exchange the old currencies with RBI. I was talking to one of the district cooperative banks’ CEO & the Chairman who had received deposits of over 600 crores in old currency and RBI was refusing to accept the same as the cooperative banks were not supposed to take deposits in old currency. The matter got sorted out months later after lengthy deliberation. Please note MP was a BJP-ruled state then. Possibly I have to write ten more pages minimum if I have to narrate my first-hand experience. But that’s not what I contemplate writing over here. I just wanted to point out that I had access to a lot of inside information that people may not be aware of in general.
Three years back I wrote “I am in no way supporting the cause of black money in line with “Alcohol is injurious to health” But one can not deny the impact of black money on the Indian economy. The recovery path is going to be lengthy and painful.”
Whether demonetization has helped economic development or not cannot be answered in one sentence. Let’s have a look at the objective of the move and to what extent it has achieved its purpose……
Economic Affairs Secretary S.C. Garg said the objectives of the note ban such as checking black money, terror financing, promoting digital transactions and weeding out fake currency notes had been achieved. “I think demonetisation has achieved its objective quite substantially."
Objectives:-
- Black money- The government estimated that ₹3 lakh crore, or approximately 20%, of the demonetized banknotes, would be permanently removed from circulation. It was expected to reduce fiscal deficit to that extent. However, according to a 2018 report from the RBI, approximately 99.3% of the demonetized banknotes, or ₹15.30 lakh crore of the ₹15.41 lakh crore that had been demonetized, were deposited with the banking system. So in reality demonetization totally failed to catch any black money
- Counterfeit banknotes- After demonetization, there was an increase in the number of counterfeit ₹100 and ₹50 banknotes. The number of counterfeit ₹500 and ₹1,000 (demonetized version) banknotes saw an increase in 2016-17 and subsequently a decline in 2017-18. But in 2017-18, there was an increase in counterfeit ₹500 and ₹2,000 (new version) banknotes from the previous year. There has been no significant change in the number of counterfeit banknotes detected. In 2017-18, the number of detected counterfeit banknotes was close to the number before. So here also demonetization has failed
Currency value/volume in circulation - There has been no reduction in the currency value or currency volume in circulation because of demonetization or because of the much-hyped digital economy. Both have rather gone up in high proportions as shown in the below two pictures. So here also demonetization has failed to bring the desired objectives. On 28 October 2016, the total banknotes in circulation in India were valued at ₹17.77 lakh crore (US$260 billion). And as of 30th December that stood at 32.32 lakh crores.
Currency to GDP ratio - Here also demonetization has failed to bring any improvement. Rather the currency-to-GDP ratio has deteriorated under the Modi government. It has increased from 11.6% in 2013–14 to 14.4% in 2020–21 despite Covid.
Increase in the Tax net and Income Tax collection - I am putting up the following two pictures of personal income tax collection and Corporate tax collection. You would observe that the Modi government has not been doing any better despite demonetization and the tall claim of expanding the tax net. So we do not see demonetization doing anything great
Digital payment - One of the objectives of demonetization was said to reduce the use of currency use and make more use of digital payment modes. We have already seen that contrary to the claims made by the government the currency in circulation has gone up by all the measures. Another false propaganda is that the digital mode of payment has seen tremendous growth over the last few years. However, that is also not true. What happened actually is that the UPI mode of the transaction has grown cutting down other modes of digital payments - like Net Banking, Debit Card, NEFT, RTGS, IMPS as well as cheque payments. Modi government has not shared this truth with us. What he projected us to believe is half the truth. That is exactly the reason the currency in circulation has not gone down but rather gone up in much higher proportion than that in the UPA regime. And who has gained because of the growth of UPI-based payment? China & US. Google pay - US, Paytm - China-funded, PhonePe - US & China. The money that would have gone to the Indian banks if we would have make more of net banking is now going out of the country. Most other digital modes of payment routes are owned by foreign farms or have their financial investment. Indian banks are the biggest loser because of the growth of UPI payments. The usage of Net banking is more beneficial to the Indian economy.
Terrorism and internal security-Initially there was a decrease in the activities and attacks by Maoist and Naxalite radical groups which was attributed to a lack of finance following demonetization. The surrender rate had reached its highest. The activities returned within a few months. However, you can see there has been a marked increase in terror activities in Jammu and Kashmir ( Date source - Press Information Bureau). I have shared another report for a larger period presented by the South Asia Terrorism portal. If you follow the trend, you wouldn’t see any impact of demonetization. In fact, UPA II did a much better job. While contrary to general belief UPA I drastically brought down the terror incidents from the Vajpayee era. The number of terrorists gunned down during the UPA I regime is much higher than that under the Modi regime. Casualties of security forces and civilians were also brought down drastically by the UPA II regime. What about safety & security? An allegedly weak PM’s government gunned down 4241 terrorists. Whereas only 1666 terrorists were gunned down during nine years of the strongest PM. Pakistan occupied Kargil during the tenure of great PM Vajpayee Ji. Which India recaptured only after estimated 5000 casualties of our forces. And then China occupies 1000 Sq. Km of our land during the tenure of another great PM. Incidentally, both are from BJP. Neither Vajpayee attacked back Pakistan, nor Modi Ji attacked China, not has taken back the territory occupied by China. But people call Dr. Manmohan Singh a weak PM and expected him to attack Pakistan. India supposedly made the Balakot attack in retaliation for the Pulwama attack, But nobody knows about the casualty inflicted on that side of the border. Even the MHA report doesn’t say anything. The only thing that is on record is that we lost an aircraft and our pilot was captured by Pakistan.
So whichever parameter we take, we do not see any positive contribution of the Demonetisation. However, demonetization has served devastating impacts on the economy. Look at the negative impact of demonetization on the Indian economy.
Unemployment - Unemployment became highest in 45 years after demonetization.
Gross NPAs jumped to 11.2% or Rs 10.39 tln in FY18: RBI Report -System-wide gross NPAs of banks rose to 11.2% or Rs 10.39 trillion in FY18 from 9.3 percent a year ago. Contrary to general belief it would be wrong to assume that the entire NPA is because of financial scams and fraud. The spiral rise of NPA is because of demonetization. The impact is still there. Only in the FY 2019–20, a fresh NPA worth 3.7 lakh crore was generated, and a fresh NPA worth 2.6 lakh crore was generated in the FY 2020–21. The return on banking assets went down by almost 300% negative.
Three years back I presented the above picture of the rupee value against the US dollar and the probable scenario by end of 2022. However, the rupee’s performance has surpassed that estimate even.
I am sharing multiple parameters of the economic indicator. I am showing a little old data to reflect the actual position of the economy as well as the impact of demonetization. Though the government kept on claiming so many things about economic growth
Top Exporting Countries of the World. India ranked 18th on the list
With imports of US $447 Billion in 2017 India ranked 11th in the list of top importing countries. India's trade deficit have reached a record high of $176 billion in 2018-19
Foreign exchange reserves
Top ten countries with positive current account balances. Whereas despite India claiming as 5th or 6th largest economy didn’t have positive CAB. the picture wouldn’t change even if we consider current statistics.
Top 3 countries with the largest current account deficit ( CAD)
The World's Largest Banks By Total Assets: The following list is based on the 2018 S&P Global Market Intelligence report of the 100 largest banks in the world. The ranking was based upon assets as reported and was not adjusted for different accounting treatments.
Apart from the consolation of being the 5th or 6th largest economy, if we see the other parameter we are very poorly placed in the world economy. We were 146th in per capita GDP, 18th in export, 3rd largest in CAD, 8th in FOREX, and with a $176 billion trade deficit. The largest Indian bank “The State Bank of India” ranks poorly at 55th position. ( This is part of my answer written in 2019, as such the figures shown are not up to date. I am not changing them either to connect with the impact of demonetization). I can share a hundred other statistics but you would not be able to show a single parameter where demonetization has made a positive contribution.
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