Central & South Asia

Demonetization: Modi’s Triumph or His Biggest Failure?

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Indian rupees © Triloks

January 16, 2017 13:18 EDT

Has Narendra Modi succeeded in removing black money from the economy or has he brought India to its knees?

Spending the last day of the year in Udaipur, India, I stumbled upon a street restaurant called Bombay Pav Bhaji. After my meal, I took out Rs300 ($4.40) to pay the owner. He asked me to pay him digitally through PayTm, an ecommerce startup in which users can make payments online (and this is a street shop, not a restaurant). Five years back, it was unimaginable for a citizen of India to go cashless at such a store. How did this happen? The answer lies in Prime Minister Narendra Modi’s sudden decision to remove 86% of cash from the country’s economy.

On November 8, 2016, Modi declared that Rs500 ($7.30) and Rs1,000 notes were no longer legal tender. He hailed demonetization as an iconic move to nip forfeit currency and corruption in the bud.

Before demonetization, more than 2.6 million fake notes of the currency denominations of Rs500 and Rs1,000, with a face value of Rs167 crore ($24.4 million), had been seized by law enforcement agencies between 2011 and 2015. Fake Indian currency notes in circulation were believed to be around Rs400 crore ($58.5 million), which was also used in funding terror activities across the India-Pakistan border. Before demonetization, India’s “shadow economy” (the untaxed part) was 26% of the country’s gross domestic product (GDP).

For many Indians, Modi is a beacon of nationalism—a man who binds the country together through his iconic speeches. But for the opposition, he is an authoritarian figure who has made the honest Indian suffer through his sudden decision to remove cash from the economy.

Manmohan Singh, India’s former prime minister, called the move “organized loot, legalized plunder.” As a renowned economist, Singh said the premise of the move was on a flawed assumption that “all cash is black money and all black money is in cash.”

donate to nonprofit media organizationsHoarding cash at home is common in most Indian households. But the fact that cash kept at home by honest Indians will never be expected to range in the millions cannot be discounted either. An “honest” middle-class Indian citizen would keep that money as gold in his bank’s safety deposit box, rather than at home, for fear of it being stolen.

The intention here is to not support demonetization without reason or in blinded faith toward the Modi government. The aim is to understand the decision and the great Indian tamasha (facade) that arose out of it, so we can gain a perspective on where this scheme succeeded and how large the magnitude of its failure really is.


Let us rewind to day one and see the developments that followed the announcement.

November 8: Modi declares that Rs500 and Rs1,000 notes are no longer legal tender. Pharmacies, shops, hospitals, petrol pumps and other essential goods operators will continue to transact on old notes. If someone wants to convert more than Rs250,000 ($3,600), they will have to provide an explanation for why they have so much cash and prove they have paid tax on it. If they don’t, they are expected to pay a fine of 200% of the tax they owe.

November 9-10: Banks remain closed as preparation for the new Rs500 and Rs2000 notes are done across the country.

November 11: People start queuing up in large numbers outside banks to exchange their void notes for new ones; panic ensues as banks run out of money.

November 12-16: Dozens of deaths are reported across the country, partly because of standing in long queues or because ambulances refuse to offer services on old notes.

A month after demonetization: The unorganized sector is believed to have been the worst-hit by this scheme, especially those workers who received their income in cash.


Mamata Banerjee, Rahul Gandhi and Arvind Kejriwal were some politicians who stood together in unison, opposing the move.

For Banerjee, demonetization was an assault on the “lakshmir jhapi”—the vegetable vendor or tea garden worker who sustains his/her family on their daily income. However, the fact that Banerjee’s state is home to Kaliachawk, the center of the fake currency network in eastern India, cannot be discounted. In 2015, the National Investigation Agency (NIA) estimated that 80% of fake currencies were smuggled into Kaliachawk through Bangladesh. The industry has now been hit hard by this sudden move.

Kejriwal, once a hope for a “reformed” India due to his “anti-corruption” stance that propelled him to win the Delhi elections in 2015, termed Modi’s decision as a “Tughlaki farman”—referring to the medieval emperor Muhammad Bin Tughlaq, a man driven by hasty decisions that cost his supporters more than him. Kejriwal also stated that the move was to save those big businessmen who hold big money. But the fact that the big businessmen who are being “protected” are not really the people who hoard large sums of cash at their homes has been forgotten. The target audience of demonetization was someone else.

India is also a country that houses Rahul Gandhi, the current scion of the Gandhi family and the Congress party, who passes blanket statements like “demonetization is a ‘Modi-made disaster’” and “the scheme was launched to ‘repay’ 50 super rich families which helped Modi become the Prime Minister of India.”

Let us suppose that Rs50,000 crore ($7.3 billion) came into India’s exchequer post-demonetization and the government decided to transfer a thousand crore ($146 million) each to 50 families. Wouldn’t the transactions of $146 million into 50 accounts (or in cash) come under scrutiny by income tax authorities?

Opposition to the demonetization scheme needs to have a logical reasoning behind it. The fundamental argument being presented against demonetization is that the laborer and the farmer—people reliant on cash as their sole source of income—have been severely affected by the scheme. To understand the plight of people living below the poverty line who can be potentially affected by such a scheme, we need to take a look at the amount a person from the unorganized sector in India earns.

The aim of demonetization is to protect the common man. It is to put those who are laundering money in real estate, NGOs and educational institutions into a tight spot…

According to a 2014 report in The Hindu, an average farmer earns Rs6,426 ($94) a month. And that’s not just from farming—it’s from a host of other activities. Growing sugarcane, a profitable crop, can fetch Rs30,000 ($440), but not many farmers have access to more than half an acre of land in India. The actual farmer subsists on less than Rs100 ($1.50) a day. Indeed, it can be presumed that a laborer in the suburbs of an urban city in India may have kept Rs500 notes in bulk at home to send to his village. But does he use those notes on a daily basis?

For Manu Sharma, editor at CVoter, an international polling agency, the argument is simple. What people are overlooking is the fact that the prime minister and finance minister have repeatedly said they will not “replace” the cash within the economy. Rather, they want less cash to flow within the economy.

By December 19, 2016, about Rs13 lakh crore ($190 billion) of the Rs15 lakh crore ($219.5 billion) of demonetized currency notes was deposited to bank counters. The government needs to print Rs15 lakh crore to get cash flowing in the same amount into the economy as it was before demonetization. Former Finance Minister P. Chidambaram has said that it will take a minimum of six months to get cash flowing into the economy at the same rate, given the printing capacity of the note presses of the Reserve Bank of India (RBI). However, do we really need that much money in the economy now?

A less cash economy means that money can finally flow into bank accounts, heralding a new era where subsidies can directly be deposited into the bank accounts of the poor. In 1978, when then-Prime Minister Morarji Desai decided to ban high-value currency, his move failed because very few people belonged to the upper classes that could hoard such high-value notes. The objective of demonetization back then was also very different, so comparing then to now is illogical.


One needs to understand and answer a basic and very fundamental question: Who generates black money in India? The answer is: real estate moguls, private educational societies, nongovernmental organizations (NGO) and cooperative banks, which do not fall under the purview of the RBI.

There are other arguments against the scheme, such as the postponement of weddings, which have caused thousands of dollars in losses for middle-class Indian families. The movement of a celestial object can also delay or postpone a wedding in India, a country highly reliant on religious values. Right now, the cancellation of weddings is not the “biggest problem” arising because of demonetization.

On January 5, after nearly 60 days of the scheme’s implementation, President Pranab Mukherjee said demonetization will lead to a “temporary slowdown” of the economy. We need to read between the lines here. Goldman Sachs, a reputed finance firm, has said that GDP growth for the fiscal year would fall from 7.6% in 2016 to 6.8% in 2017. The company also said, “Eventually, the currency reform should help to move economic activity into formal channels, accelerate financial inclusion, and increase government revenue,” something very conveniently left out in news pieces on the scheme.

Member of Parliament Jayant Sinha, an ardent spokesperson on the scheme, explained the cash crunch from the administrator’s point of view. When Rs2,000 notes were circulated into the economy to fill in the cash void from Rs1,000 notes, the Rs2,000 notes were expected to fill the gap faster as it is double the amount. However, the combination was left incomplete because Rs500 notes were not circulated, therefore, people could withdraw notes but not exchange them as they had no change. Hence, the government began circulating Rs500 notes into the economy to fit the combination.

The reason for withholding the Rs500 notes was to prevent further counterfeiting. Those in the counterfeiting business could print the Rs2,000 notes, but they were unable to use them anywhere because they couldn’t exchange them until the Rs500 came into circulation. The measures being taken by the government need to be understood in the larger framework of what is really happening both within and outside the country.

No decision can be “perfect” in a nation with over a billion people, and what cannot be denied is that there were constant changes in policy by the government almost every week after demonetization, which confused the common Indian and caused chaos. The plan was a failure from the start because it was discreet, abrupt and had to be changed at every step for the government to outwit tax evaders and black money hoarders.

Jan Dhan bank accounts—a financial inclusion scheme under the Modi government—reported a whopping Rs21,000 crore ($3.1 billion) deposit following the implementation of the scheme, whereas only 3.5 million accounts had been opened under the initiative. Then came the question of someone siphoning the money off someone else. Again, the government had to bring out a circular stating that those depositing money for others would also fall under the income tax bureau’s notice.

An article published by Vox highlights the absurdity of the criticism: “Property sales, which typically require huge cash investments, are slowing.” Firstly, property sales in cash mean it is being done in black money. That laundering has been stopped by demonetization.


The aim of demonetization is to protect the common man. It is to put those who are laundering money in real estate, NGOs and educational institutions into a tight spot so they can transact only through one method: online. The average Indian is not being forced to go online—the money launderer is. Those inconvenienced by less cash within the economy have their reasons to oppose the scheme, but the larger picture cannot be evaded and the necessity for the implementation of demonetization cannot be denied, either.

Today, more than 60 days after the scheme, cities like Udaipur in the state of Rajasthan, Gwalior in Madhya Pradesh and Durgapur in West Bengal have cash at their ATMs and few people wait in line. Mobile traffic has been diverted from Facebook to online payment websites in India.

The deed is done. What we can do is look ahead and see the future in front of us. No scheme can be implemented perfectly in India, one of the most diverse and populated countries in the world. Modi’s government may have stifled voices of protest, engaged in intolerable debates, and taken little or no action when a man was killed by a mob for allegedly possessing beef, but for once the prime minister deserves our attention for the right reasons. When Modi pulled the brakes, he threw the infinitesimally small measures taken by the previous government out of the window too. It’s time that we take notice.

*[This article was updated on January 17, 2017.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

Photo Credit: Triloks

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