Demonetization : Ruining a settled economy

Look at the image carefully. The face of the man tells us countless stories of hardships suffered and misfortunes born because of Demonetization. It is another matter that those who can and should ease his pain never even registered the photo in the first place.

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Major historic events, after a while, are represented only by their photographic representations. The details are forgotten, it is the images, and often just one image, that encapsulates the entire story and human drama that may have played out over months and years.

Thus, while we may not recall what exactly happened on the night of December 2, 1984, when lethal gas leaked out of the Union Carbide plant in Bhopal, we instantly recognise the photo of a father’s hands around his dead child’s face. Similarly, the running girl, naked because the napalm US planes had dropped had burned off her clothes, triggers off the memory of bombing in Vietnam. Other iconic images include the sailor kissing the nurse in New York – representing th symbolic end of the Second World War, and two memorable photographs – one of a sword-wielding man, out to taste blood, and the other showing a teary man with folded hands, begging for his life – tell the complete story of the 2002 pogrom in Gujarat.

Many such images are powerful in themselves; the story behind them enhances their power. By itself, the Hindustan Times photo of an old man crying, apparently because he lost his place in a queue to withdraw his pension, is the kind experienced photographers looking for human interest stories bring back fairly routinely. It is one of the many pictures that have appeared in the media in the past month or so, telling tales of the frustration and helplessness of ordinary Indians, of people shouting, crying and even dying as they try and access their own money. Yet, this one went viral on the social media, and has become symbolic of a decision gone horribly wrong.

The pain of Demonetization is not going to disappear any time soon , even after 9 months we can still feel its affect on Indian economy.  We would be foolish to think of this radical step being a whimsical, one-off move; this is part of a larger plan to redraw the way not just the country is administered but also how citizens themselves run their lives.

Manmohan’s stake on Demonetization

Manmohan Singh, former prime minister of India and world-renowned economist, was one of the first people to say that demonetisation would have a negative impact on the Indian economy.

Speaking in Rajya Sabha on November 24 – just two weeks after Prime Minister Narendra Modi announced demonetisation in a primetime television address – former PM Manmohan Singh tore into the government with a searing speech that called the note ban exercise “A monumental management failure” and a case of “organized loot and legalized plunder of the common people.”

I am reminded of John Keynes, who once said, ‘In the long run, we are all dead’,” Manmohan Singh said in response to those “who say that this measure will do harm or will cause distress in the short run, but is in the interest of the country in the long run“.

Lets listen to his speech –


Halfway through his Rajya Sabha address on demonetisation, Manmohan Singh warned that the move would negatively impact the Indian economy. “I would further like to point out that, in my opinion, this scheme of demonetization, the way it is being implemented, will hurt agricultural growth in our country; will hurt small industry; will hurt all those people who are in the informal sectors of the economy,” he said before going on to predict that the note ban exercise could result in a 2 per cent drop in India’s GDP growth.

“My own feeling is that the national income, that is, the GDP of the country, can decline by about two percentage point as a result of what has been done,” the former PM had said. “This is an underestimate and not an over estimate.”add 2


Demonetization : After 6 months of implementation

Barely six months after demonetisation, India’s Gross Domestic Product or GDP growth rate has slumped down to 6.1 percent in the January-March period, lowest in more than two years. This growth rate was unexpected as the Central Statistics Office earlier in January had estimated 7.1 percent growth as compared to the 7.6 percent in 2015-16. With this March quarter report, India lost its status as the world’s fastest growing major economy.

The demonetization resultant slowdown in household spending and corporate investment were evident in the fall in GDP growth estimates released by the government. The GDP growth for the Financial Year 2017 (FY17) was reported at 7.1% while for the fourth quarter of the Financial Year 2017, the GDP growth stood at 6.1%. The growth of the farming sector stood at 5.2% for the fourth quarter FY17 while for manufacturing sector it was 5.3%.

Growth in Gross Value Added (GVA) in the fourth quarter FY17 was 5.6% versus 8.7% in the corresponding quarter in the previous fiscal, while in the third quarter FY17, GVA growth was 6.7% versus 7.3% in the third quarter of FY16.

For the entire FY17, GVA in mining was at 1.8% falling sharply versus the 10.5 % recorded in FY16, while that for agriculture was at 4.9% in comparison to the 0.6% registered in FY16. Similarly, GVA for construction sector for the entire Financial Year 2017 was at 1.7% versus the 5% recorded in FY16, while for Real Estate sector GVA for the entire FY17 stood at 5.7% versus the 10.8% registered in FY16.



Demonetization : After 9 months of implementation

Economic scenarios –

The gross domestic product (GDP) numbers for the first quarter of fiscal year 2017-18 ie April – June are in and the picture does not look pretty as far as the economic datasheet of the nation is concerned. The data shows that Indian economy grew 5.7 percent in April-June, sharply lower than last year’s 7.9 percent expansion in the same quarter as also the previous quarter’s 6.1 percent growth, signs that the country was still reeling under the shock of demonetisation and disruption caused ahead of GST’s rollout.

It is also the lowest growth since the Narendra Modi-led NDA government came to power in 2014. India now lags China in the global growth rankings by a fair margin. China, which grew at 6.9 percent in the last two quarters, has bounced back as the world’s fastest growing major economy since January, regaining the status from India after two years.

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Importantly, the CSO estimates shows that Gross value added (GVA) grew 5.6 percent in April-June lower than the last year’s 7.6 percent growth during the same quarter. The latest growth numbers is a throwback to 2013-14, when India slid to a decade low sub-5 percent growth, buffeted by a string of corruption scandals at home and uncertain external economic environment.

The effect of the sudden flushing out of high-value notes in November 2016 and the resultant slowdown in household spending and corporate investment may well explain the current slowdown in an economy that was until recently an engine of global growth GVA.

The widespread de-stocking by companies and traders ahead of the switchover to Goods and Services Tax (GST) from July 1 may have also had an impact on the broader economy’s growth.

Let us see some details analysis of GDP growth –

  • The manufacturing sector crawled at 1.2 percent during the quarter-ended June from a 10.7 percent growth in the same period last year.
  • Gross fixed capital formation (GFCF) grew 1.16 percent during the quarter compared to 7.39 percent in the same period in 2016.
  • The national income data showed GVA in the private corporate sector, which accounts for more than 75 percent in the manufacturing sector, fell 0.9 percent at current prices during April-June from a 10.2 percent growth in the same quarter of the previous year.
  • GVA growth in the quasi corporate and unorganised segments slowed down to 1.8 percent during the first quarter of 2017-18 from 6.7 percent last year.
  • Manufacturing growth (GVA) in the first quarter of the current financial year plummeted to 1.2 per cent from 10.7 per cent in the year ago.
  • The production of crude oil declined 0.5 percent , refinery products 2.7 percent , fertiliser 0.3 percent and cement 2 percent.


But, there are some ray also in dark –

  • The core sector, however, held out hope of a recovery, growing 2.4 per cent in July compared with 0.8 per cent in June as natural gas, steel, electricity and coal production increased in the month.
  • The eight core sectors grew 2.4 per cent in July compared with 0.8 per cent in June led by a favourable base effect for steel, cement, fertilisers and electricity. Electricity generation accelerated to 5.4 per cent in July from 2.2 per cent in June.
  • “Q2 FY18 growth may also remain muted. Overall, it remains to be seen whether the GDP growth for the current fiscal stays below 6.5 per cent ,” said Soumya Kanti Ghosh, group chief economic advisor, State Bank of India.


RBI DATA on money collection –

The Reserve Bank of India’s (RBI) annual report has revealed, among other things, that almost all of the demonetised currency has found its way back to the central bank. The central bank was criticised several times in the past for seemingly withholding information on how much black money was filtered from the system. Now, finally, its report is out. However, the RBI does caution that is still in the process of checking and verifying soiled and questionable bank notes.

See the RBI’s report over here –

The notes that were demonetised on November 8, 2016, or the specified bank notes (SBNs), were worth Rs 15.45 lakh crore. This was the majority of the overall Rs 17.97 lakh crore that was in circulation during that period – meaning, 86% of India’s currency was rendered valueless overnight on November 8.


Almost 99% of demonetised currency has returned to the central bank

The RBI report has now revealed that Rs 15.28 lakh crore of the demonetised Rs 15.45 lakh crore has been received as of June 30, 2017.  98.96% of all old notes have been returned. This goes against the stand of the government, who depicted demonetisation as a decisive war against corruption and black money.

In November 2016, Attorney General Mukul Rohatgi had claimed that demonetisation would lead to about Rs 4 lakh crore not returning to the system. This unaccounted-for money, he said, would be “a straight write-off of the debt of the government of India”.

He had said, There is roughly Rs 17 lakh crore rupees in circulation. Our estimate is that approximately Rs 11 to Rs 12 lakh crore will come back into the banking system through this scheme. Again, our assessment is that Rs 3 to Rs 4 lakh crore which doesn’t return is prima facie is the black component of the currency in circulation.”

However, in the months after demonetisation, the Finance Ministry repeatedly said that it had no estimates regarding the amount of black money in India (something the Prime Minister seemingly refuted in his Independence Day speech).

The RBI report says that only 89 million of the 6.7 billion demonetised Rs 1,000 notes were not deposited back to system“The value of banknotes in circulation declined by 20.2% over the year to Rs 13,102 billion as at end-March 2017. The volume of banknotes, however, increased by 11.1%, mainly due to higher infusion of banknotes of lower denomination in circulation following the demonetisation,” the RBI notes.

Fake notes –

Another much-touted advantage of demonetisation is that would help curb the amount of fake currency in circulation – fake currency that the Modi government believed helped anti-social elements engage in criminal activities. The report concludes that only 0.0007% of Rs 1,000 notes and 0.002% of old Rs 500 notes were found to be fake.

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Cost of printing new notes – 


The central bank also states that the total expenditure incurred on printing bank notes for the year July 2016- June 2017 was Rs 79.65 billion as opposed to Rs 34.2 billion during 2015-16.

Demonetisation-related costs have also lowered RBI’s surplus and its dividend to government.

Now, if that loss is made good through tax rather than non-tax revenue, those who would end up paying for the note ban’s demerits would be the taxpayers. Ironically, then, those hurt by demonetisation would not be black money hoarders but honest taxpayers.

In the year ended June 2017, the Reserve Bank of India (RBI) transferred just Rs 30,659 crore as dividend to the government. This is less than half the previous year’s level, which stood at Rs 65,876 crore. Partly due to demonetisation, it was expected that the gains will be as high as Rs 74,901, however, the same did not happen.

Additionally, the reserve money position fell by 13% for the first time since 1952, indicating a drop in the RBI’s Seigniorage income (income earned through printing and managing currency). It remains to be seen if this decline in seigniorage income will persist, as digitisation will put cash need in the economy on a downward trajectory. add7

The opposition parties of India are attacking the government after Reserve Bank of India releases a report which states that 99% of the junked currency has returned. The annual report of RBI disclosed that out of Rs. 15.44 lakh crore junked currency notes, Rs. 15.28 lakh crore or 98.6% has came back to them after demonetization. This means that Rs. 16,000 crore of demonetized notes have not returned to the RBI. The report also stated that 89 million units out of 632.6 crore demonetized Rs. 1,000 notes, the value of which is Rs. 8,900 crore, has not returned to RBI.

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The opposition leaders are calling “Demonetization” a big failure and asking whether this whole campaign was run in order to convert their own black money into white. Rahul Gandhi, the Vice-President of Congress, has termed demonetization as “colossal disaster” which also resulted in innocent deaths as well as ruined the economy.

Modi has been proved wrong:add 9

Nepal – Bhutan factors

Currently, there is Rs 16,000 crore, in the form of demonetised Rs 500 and Rs 1,000 notes, that haven’t made their way back into the Indian banking system. As some media groups has reported in the past,  a certain amount of these banknotes are in India’s neighbouring countries. In Bhutan and Nepal in particular, Indian rupees are used more often than not as a valid form of currency. In Bhutan, the total amount of Indian rupee notes deposited by locals was Rs 1.60 billion or Rs 160 crore as per the country’s central bank.

Although news reports have indicated that the country holds Rs 3,000 crore worth of banned Indian currency, the sourcing of this figure is not clear. As some media houses has reported, Indian rupees do account for 30% of Bhutan’s foreign exchange reserves (roughly Rs 37 billion or 3,700 crore), it’s not clear whether this is held in the form of Rs 500 and Rs 1,000 notes.

When it comes to Nepal, the situation is a little more complex. Although Indian news reports have identified Nepalese citizens has holding an estimated Rs 3,200 crore, sources tell that Nepal is yet to come up with an accurate estimate on the total number of Indian banknotes in the country.

“The factual position right now is that RBI and NRB [Nepal’s central bank] have yet to reach a decision,” a senior government official in response to question.

What does 99% of currency coming back mean?

If Rs 15.28 lakh crore out of Rs 15.44 lakh crore has come back into the system what does this mean for black money? According to analysts, there are two broad explanations.

  1. The proportion of black money that was held in the form of cash was quite low.
  2. The proportion of Rs 500 and Rs 1,000 notes that was black money has been successfully laundered back into the system.

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International response over Demonetization –

In what is an out-and-out blow to the Indian Government, Forbes has said that demonetization was ‘sickening and immoral’. And that’s not it. He went on to say that the move was a ‘massive theft of people’s property’.

What India has done is commit a massive theft of people’s property – a shocking move for a democratically elected government”, he said , head FORBES.

Calling the Indian bureaucracy ‘notorious’ for corruption, red tape, and lethargy, Forbes compared the decision with former PM Indira Gandhi’s infamous sterilization program in the 1970s.

“Not since India’s short-lived forced-sterilization program in the 1970s–this bout of Nazi-like eugenics was instituted to deal with the country’s “overpopulation”–has the government engaged in something so immoral,” he said.

Forbes has criticised the Indian government’s narratives to support demonetization pointing out that businesses are closing as companies are not able to pay their employees, and that currency change cannot stop terrorists from committing evil acts of terror. He went on to say that digitization “will happen in a free market one way or the other, but it needs time”.


But apart from criticism, Forbes also had some advice to share.

“India should get rid of such a complex tax system, which is the main reason for tax evasion. India should slash income and business tax rates and simplify the whole tax structure; make the rupee as powerful as the Swiss franc; hack away at regulation.”

Raghuram Rajan factor –

Former RBI governor Raghuram Rajan has revealed that he did not favour demonetisation as he felt the short term economic costs associated with such a disruptive decision would outweigh any longer term benefits from it.

Rajan makes the disclosure in his latest book –  I Do What I Do: On Reform, Rhetoric & Resolve – which is a compilation of speeches he delivered on wide range of issues as the RBI governor. Although he maintains the book is not a tell-all, the short introductions and postscripts accompanying the pieces offer fascinating insights into his uneasy relationship and differences with the present government.


At no point during my term was the RBI asked to make a decision on demonetisation” Rajan has said, putting to rest speculation that preparations for scrapping high-value banknotes got underway many months before Prime Minister Narendra Modi made the surprise announcement on November 8.

This is the first time the former RBI governor has spoken on demonetisation since demitting office on September 3 last year. Rajan, who now teaches economics at University of Chicago, said he chose not to speak on India for a year because he didn’t want to “intrude on his successor’s initial engagement with the public”.

It is probably fair to say that demonetisation has had the largest impact on the people who transact informally, of which many might be very poor” he said. “…As the economy gets remonetised, hopefully some of them will bounce back but there are also people with very thin buffers. Some informal firms may have closed down because of the kind of stress they experienced and we will have to, over time, see how we can measure and get a full understanding of the impact of demonetisation.

Rajan maintained that the intent of the exercise was good. “I think the view of any monetary economist would be that you first print the money and then do the demonetisation, and I do not know what the rationale for doing it when it was done is” Rajan told.

I was asked by the government in February 2016 for my view on demonetisation, which I gave orally. Although there might be long-term benefits, I felt the likely short-term economic costs would outweigh them” Rajan wrote. He didn’t elaborate on the short-term costs or the possible long-term benefits, but as the RBI governor he “felt there were alternatives to achieve the main goals.


Still, Modi won popular support for his move, winning a landslide victory in crucial elections in Uttar Pradesh. Most people, especially the poor, backed his decision as a frontal attack on black money. But doesn’t he answerable to us who stood in lines for days. Isn’t he responsible for 110+ deaths for such a mis-matched policy with reality. Isn’t he accountable to us for implementing a policy without any home work.

Usually upper & middle class people don’t face that much hardship , which lower class people go through. Though in demonetization count of both middle and lower class was extremely high when it come to hardship. Richer went to hawala dealers for converting their illegal money but common Indian had to go through all those hardship for more than 4 months even for their hard-earn money. Govt should have implemented complete measures to secure right and interest of lower and middle class. But Govt was busy in cashing political benefits of Demonetization and in all those emotional speeches. Even the warning of our ex-PM Dr. Manmohan Singh was neglected , in which he clearly stated that economy is going through a shock-wave, which will decline GDP by 2%. But any how Modi ji and his Cabinet was playing in political blame game with opposition.

Now rest to your intuition, Nation is facing both micro and macro problems because of Demonetization. From industrial production to GDP of nation , both declined in last 9 months. From Start-ups to big corporate’s balance sheets , everything is unbalanced.


An Indian Inside



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