Six Years On, Jury Still Out On Demonetisation Promises

November 8, 2022 marks six years to the day when Prime Minister Narendra Modi, at the stroke of 8 in the night, invalidated the two biggest denominations of Indian currency—Rs 500 and Rs 1,000 notes. Among the objectives were tackling black money, weeding out corruption, putting a check on fake currency, pushing for a cashless economy and formalisation of the informal sector. Six years on, the jury is still out on how much has been achieved.  

Where Is The Black Money?

PM Modi had said that demonetisation would bring out the lakhs of crores of black money stashed away by the wealthy. But, data from Reserve Bank of India (RBI) showed that the entire chunk of money (over 99 per cent) that was taken out had come back into the banking system. The total amount of invalidated currency was Rs 15.41 lakh crore, against which currency worth Rs 15.31 lakh crore had returned.  

There is no data available on the amount of black money that was recovered through this exercise, though, in a Parliament reply, then finance minister Piyush Goyal had said in February 2019 that anti-black money operations, including demonetisation, had managed to recover Rs 1.3 lakh crore. The government’s own expectation was that it would be able to extinguish at least Rs 3-4 lakh crore in black money through demonetisation.  

Fake Currency Is Still Here

Official figures show that just like black money did not come back into the system, fake notes did not disappear from India post-demonetisation. In 2016, around 6.32 lakh fake currency notes were seized across the country. An RBI annual report that was released in May this year shows that fake currency detection grew 10.7 per cent in the financial year ending March. As per RBI’s data, there was a 101.93 per cent increase in counterfeit notes in the Rs 500 denomination, while there was a 54 per cent jump in counterfeit notes of Rs 2,000. In the four years after 2016, fake notes totaling 18.87 lakh fake notes in various denominations were seized across the country.  

Big-Ticket Cash Transactions Are Happening

Another objective was weeding out corruption. This was to include big-ticket cash transactions that bypassed existing regulations. Several experts and economists had argued that only 5 per cent of black money in circulation was in cash, while the rest was stored in the form of assets like gold and real estate. So, with his masterstroke, PM Modi had hoped to curb high-value cash transactions that were often seen in real estate purchase in India. However, apparently things have not taken the expected course. A study by LocalCircles has found that 44 per cent of those who bought property revealed using cash as part of the transaction. “Anecdotal evidence reveals that people are still paying or accepting black money in real estate transactions,” the report said.  

To the query on what percentage was paid in cash for real estate purchase in the last seven years, 8 per cent of the 11,499 respondents said they paid more than half the value in cash. “Of the remaining, a whopping 35 per cent refused to divulge, 21 per cent claimed they had paid no cash during the transaction, 15 per cent had paid between 30-50 per cent of the transaction in cash, 13 per cent had paid 10-30 per cent in cash and the remaining 8 per cent had paid up to 10 per cent of the value in cash,” the report said. 

Rapid Formalisation Of Economy

Digitisation and formalisation of the Indian economy have been the biggest success stories of demonetisation. A few months after demonetisation, the government implemented the Goods and Services Tax (GST), which helped formalisation of businesses that had hitherto remained out of the tax ambit. As per the 2014 data shared by the National Statistical Organisation (NSSO), around 93 per cent of India’s workforce belongs to the informal economy, the backbone of India for the longest time and generator of maximum employment. A State Bank of India (SBI) research report last year found that India’s informal economy had shrunk to about 15-20 per cent of the formal GDP compared to 52 per cent three years ago due to increased digitisation and adoption of GST following demonetisation. The report also found that in the last few years after the note ban, close to Rs 13 lakh crore came into the formal economy through various channels.  

Since 2016, several measures accelerated the digitisation of the economy. The rise of the gig economy also led to higher formalisation. All these together propelled the Indian economy towards formalisation at rates much faster than that of most other nations, the SBI report found. “Based on this data (monthly EPFO payroll report), we estimate almost 36.6 lakh jobs have been formalised till August 2021,” the SBI report said.

The e-Shram portal, India’s first national database of unorganised workers, shows that 5.7 crore workers registered till October 30. The report found that of the 5.7 crore workers who are registered on the portal, 81.2 per cent, or 4.6 crore, had bank accounts.  

“e-Shram is a big step towards the formalisation of employment as our calculation indicates that till date, the rate of formalisation of unorganised labour due to e-Shram is around 17 per cent or Rs 6.8 lakh crore or 3 per cent of GDP in just 2 months,” the report said.

Cashless Economy

India’s UPI transactions grew 7.7 per cent to Rs 730 crore in October 2022. The total value was over Rs 12.11 lakh crore, compared to Rs 11.16 lakh crore in September. UPI transactions gathered pace post-demonetisation and peaked with the Covid-19 pandemic. The note ban gave momentum to the cashless culture, but it was the pandemic that emerged as the biggest factor that took it to the heights it has reached today, when even a vegetable vendor accepts payment through UPI for transactions as little as Rs 20.  

Interestingly, figures show that cash is still the most favoured mode of transaction in India. According to RBI data, cash in the hands of people jumped to Rs 30.88 lakh crore as on October 21, 2022, from Rs 17.7 lakh crore on November 4, 2016.  

In Conclusion

The immediate reaction to demonetisation was that of shock, followed by criticism and pessimism. Six years on, PM Modi has little to show in terms of tangible achievements of his “masterstroke”. Against that is an economy that is yet to completely recover from that setback. As former RBI Governor Raghuram Rajan put it, the short-term impact might indeed outweigh the long-term gains if any.