On 8th November 2016 the Narendra Modi Government announced the demonetization of India’s two largest currency bills with effect from midnight. After 70 odd days of demonetization, the situation seems to be in the grip of the government and the citizens too. This post will take you to a journey of 70 days in a few minutes, in short the Demonetization of 2016 wrapup.
The First fifteen days – 10th November to 25th November
The first fifteen days took a toll of India in the Demonetization drive.
The government started accepting the exchange of old currency for the new ones in these fifteen days starting from Rs.4000 till November 13, 2016, increased to Rs.4500 till November 18, 2016 reduced it to Rs.2000 till November 25, 2016 and finally stopped the exchange of currency on the same date.
Old currency could be used only till November 11, 2016 according to the notice by the Government of India at Petrol pumps, Gas booking, Railway booking, hospitals and air-ticket booking. The date was further pushed to November 14, 2016 and finally pushed to December 2, 2016.
Cash withdrawal was restricted to Rs.10000 per day and Rs.20000 per week till November 14, 2016 later increased to Rs.24000.
ATM cash withdrawal was initially restricted to Rs.2000 per day, increased to Rs.2500 per day on November 14, 2016.
People with a wedding at their homes were allowed to withdraw Rs.2, 50,000 at one go from an account and farmers up-to Rs.25000 per week from November 17, 2016.
The latter days — 25th November onwards
Once the exchange of notes was stopped, the queues at the banks reduced a little. By December 2, 2017, usage of old currency was not allowed at any point of sale across the country.
Cash came into circulation by that time, despite the queues in front of the bank not reducing drastically.
Opposition was sitting on the government’s head for various demands, while helping the people by creating more panic between them.
On 20th December, 2016, the government announced only Rs.5000 can be deposited that too only once. Any notes below that cannot be deposited in the banks, which the government later retracted with some changes in the policy.
In the meanwhile the government had promoted digital payments by starting prizes for digital users, giving incentives for the same and launching the Aadhaar based-BHIM app which can be used only with a fingerprint. No internet connection – No frills.
On January 1st, 2017, the government increased the withdrawal at ATMs to Rs.4500 per day and on January 16th, 2017; the limit was increased to Rs.10000 per day.
Salient features of Demonetization drive
In favour of Demonetization
This move received good support from various sectors. To start with, Rajdeep Surjewala of the Indian National Congress initially praised the move, but later on retracted owing government’s failure to execute the move properly.
Chief Minister of Andhra Pradesh Chandrababu Naidu, Bihar Chief Minister Nitish Kumar and the President of India Pranab Mukherjee also lauded the government’s move.
E-Commerce companies like Snapdeal, Flipkart, etc… saw a decline in Cash on Delivery feature, thereby praising the move as it would spark digital payments. Wallet Companies like PayTM, Mobikwik, etc… also saw a surge in their app usage thereby lauding the government’s move.
Countries like China through Global Times and Singapore through The Independent lauded Modi’s move and also compared him to Lee Kuan Yew, the corruption crusader and brainchild behind Singapore’s success.
The International Monetary Fund also stated in their report that Demonetization is the best way to break down the parallel economy in India.
People who criticised the Demonetization
So here comes the irony. Arvind Kejriwal, who came to power as a corruption crusader was among the top politicians who were against the demonetization drive. He conducted six rallies to prove that demonetization was India’s biggest scam ever.
INC resorted to completely paralyze the Parliamentary proceedings in the winter session demanding for a debate on a voting basis. Rahul Gandhi also claimed to bring earthquake in the Parliament if he was allowed to speak.
Mamata Banerjee also severely opposed the demonetization and also had given ultimatum for the government to revoke the demonetization move.
A massive strike of all national parties was planned on November 28, 2016 but was reduced to Akrosh Diwas, for reasons best known to the Indian public.
Finally, our former Prime Minister Manmohan Singh spoke on 24th November 2016 in a scripted way stated the loss to the economy would face because of this move and used statements like “One day, we all will be finished”.
Nothing materialized as the situation went on according to government’s wish till January 1st 2017.
Some top economists like Amartya Sen, Kaushik Basu, Pronab Sen, etc… openly criticized the government’s move of Demonetization.
After a breakneck growth of China for 25 years, China slowed down considerably and India outpaced them to become the world’s fastest growing economy. But the recent demonetization might reduce the GDP of India by minimum 1%, which might hurt our Make In India ambitions due to loss of the fastest growing economy tag too.
We saw an exponential rise in digital payments through wallets and debit cards, thereby increasing demands of POS terminals which accept PayTM wallets, POS swiping machines, etc…
Due to shortage of cash, it was reported that onions and tomatoes were sold in bulk at 50 p per kg, thereby prompting farmers to dump or burn down their crops, affecting valuable produce to the nation.
Cash-intensive logistics system came to a halt due to lack of cash for circulation. The situation was eased by not charging toll tax from vehicles for the first ten days of demonetization drive.
Railways finally installed digital payment terminals thanks to cash crunch during the demonetization.
Industrial output under the Purchase Managers’ Index fell below 50 for the first time in three years, indicating a drop in industrial output for the existing quarter.
Sex trafficking came to a halt for a while due to lack of cash for circulation in the market. Kailash Satyarathi also lauded the government’s move, but remained sceptical with the introduction of Rs.2000 notes in the market.
Maoist surrender also saw a rise due to lack of cash to buy arms and feed their citizens in November 2016. Hawala racket came to a complete closure for the next six months, hoped to remain dormant till July 2017.
Property tax evaders finally ended up paying by using old demonetized notes thanks to their invalidity to use at other payment points.
Author’s view: – Was it executed properly?
No. The government had started with a bang on 8th November, 2016, but the execution wasn’t done effectively.
Firstly, the government introduced Rs.2000 note, twice the value of the largest note in circulation before 8th November. At the ATMs, only one note used to come and without Rs.500 in circulation, the situation became worse for getting a change for the bill. The ATMs weren’t calibrated properly to dispense Rs.2000 notes for the first fifteen days of the drive.
Secondly, the government allowed the exchange of currency notes. Initially, it was for a valid proof of ID, later on photocopies of the same was allowed and that too many number of times. The government realized this late and later introduced the ink smirking on the finger of people who exchanged currency once, thereby reducing queues in the banks.
The government allowed cash at Railway stations, air-ticket booking and at toll plazas till December 2, 2017, which gave people ample time to circulate the money stashes they had. Railways should have been equipped with POS terminals at-least before announcing the more.
Strict vigil had to be kept on bank officials for account of where the cash is gone. Lots of money was recovered later in major cities in India, while the general public was suffering to get cash. Due to bad records of IDs used for exchange of cash, this became easy move for the hoarders to get their money converted easily.
Agriculture sector was affected very badly. They had to equip the markets with the necessary instruments to save the farmer’s produce, which wasn’t done adequately.
Promotion of cashless instruments started after the demonetization drive. Despite UPI and RuPay already in place, the government really started promoting digital instruments by giving incentives a month after the announcement was made.
No leaders of MPs of the BJP or NDA in general visited the banks of their constituency on a regular basis to keep the situation in control and people well informed.
The government got Rs.15.5 trillion worth old currencies back out of the existing Rs.16 trillion in the market, indicating the estimates of Rs.5 trillion failing miserably. This happened because of the above stated reasons of loopholes to convert money with ease by the hoarders.
But yes. Two things really came into regulation
- Forged currency (not issued by RBI) became completely dormant. If fake notes were pushed into the Indian economy when India promoted Make In India and GST in 2017, it would have impacted the inflation badly as the parallel economy is as strong as the mainstream economy.
- The Indian Government and Indians as a whole finally embraced digital payments. Before this, the majority population was reliant on private wallet players for digital payments. The Indian government finally launched its own universal app BHIM directly linked to the bank accounts and incentives on card payments would help India become a cashless economy.
While most of the currency notes issued by the government are back into the coffers, we are forgetting something. This money is a combined figure of money deposited in bank accounts and Income Declaration Scheme declared income. The government was busy sorting out things due to demonetization drive in 2016, this year the government is focusing on transaction/deposits of cash above Rs.10 lac in the bank accounts and suspicious transactions during the period. So we must not be worried how it was executed as the Indian government has played their first innings decently. Let’s see in the second innings of this test match against corruption, India wins or the game becomes a draw like the demonetization in 1946 and 1978.
Other links about demonetization of 2016 on my blog