On November 8, 2016, Prime Minister Narendra Modi appeared on national television and said that all Rs 500 and Rs 1,000 notes would become invalid at midnight. The announcement at 8 pm, aimed at flushing out black money — money hidden from the taxman — led to nearly 86 percent of the currency in circulation becoming invalid four hours later.
Modi’s decision surprised some economists, who argued that only about 5 percent of back money is stashed in the form of hard cash. The remainder is in the form of other assets such as real estate and gold, they argued.
There were three main economic objectives behind demonetisation — fighting black money, fake notes and creating a cashless economy by pushing digital transactions. Among those targets, the biggest one was tackling black money. Black money refers to cash that is not accounted for in the banking system or cash for which tax has not been paid to the state.
Black money failure
Did demonetisation achieve the target of killing black money? According to RBI data, almost the entire chunk of money (more than 99 percent) that was invalidated came back into the banking system. Of the notes worth Rs 15.41 lakh crore that were invalidated, notes worth Rs 15.31 lakh crore returned. In February, 2019, then finance minister Piyush Goyal told Parliament that Rs 1.3 lakh crore in black money had been recovered through various anti-black money measures, including demonetisation.
“Whether Rs 15-plus trillion of CIC (currency in circulation) was not hoarded as black money or the hoarders took advantage of legal and administrative loopholes in the demonetisation implementation mechanism to change the colour of money from black to white, the fact was that the entire demonetised currency came back to RBI. Nothing became worthless pieces of paper,” former finance secretary Subhash Chandra Garg wrote in The Quint on November 8.
In his book I do what I do, former RBI governor, Raghuram Rajan disclosed that he never supported the idea of a note ban and felt that the short-term impact of the exercise could outweigh the long-term gains.
Remember, the government had originally expected that at least Rs 3-4 lakh crore in black money would get extinguished outside the banking system due to demonetisation alone. Thus, data suggests that demonetisation was a failure in unearthing black money in the system. Meanwhile, instances of black money seizures continue.
Counterfeit note failure
In 2016, the year when demonetisation was launched, 6.32 lakh counterfeit pieces were seized across the country. In the next four years, a total of 18.87 lakh fake notes were seized across the country in various denominations, according to RBI data. In 2019-20, out of the total Fake Indian Currency Notes (FICNs) detected in the banking sector, 4.6 percent were detected at the Reserve Bank and 95.4 percent by other banks.
Most fake currency notes seized in the post demonetisation years were in the Rs 100 denominations — 1.7 lakh pieces in 2019-20, 2.2 lakh in 2018-19 and 2.4 lakh pieces in 2017-18. Compared to previous years, there was an increase of 144.6 percent in fake Rs 10 notes, 28.7 percent in Rs 50 notes, 151.2 percent in Rs 200 notes and 37.5 percent in fake notes of Rs 500 [Mahatma Gandhi New Series] denomination, the RBI data showed.
Cash is king amid digital push
Later, the creation of a cashless economy was pitched as another major target of demonetisation. How has this picked up? Cash has proved that it remains King in the post note-ban years. Currency in circulation, according to RBI data, had gone up to Rs 29.17 lakh crore on October 29, 2021, from Rs 16.4 lakh crore in 2016, as on March, 2020.
Sure, digital payments have risen. UPI payments alone have risen to $100 billion in value in October. The number is much bigger across all digital payment channels. So, what is the takeaway here? People still prefer to deal in cash to a large extent, even though there is an increase in digital transactions. This perhaps indicates that digital channels would have picked up even without the highly disruptive economic move.
Debates still rage about whether the note ban was a prudent step in the Indian economic context. While there certainly has been a discernible uptick in digital payments, it is doubtful whether the elaborate exercise to unearth black money — the stated and primary goal of demonetisation — was worth it.