Honorable Prime Minister Narendra Modi shocked Indians on 8 November 2016 when he announced on live television that all 500 and 1000-rupee notes, equivalent to about £6 and £12, would be banned in four hours’ time. The total value of invalidated Rs 500 and Rs 1,000 notes at the time of demonetisation was Rs 15.44 lakh crore or around 86 per cent of the currency in circulation.
It was the shock not only to the India Economy but also for every Indian. Notes of Rs 1000 and Rs 500 was just a piece of paper. The problem is that two big objectives that the Prime Minister had touted in his late evening speech – about catching black money and weeding out fake notes – have been less than successful, to say the least. Apart from that, the goal of Demonetisation changed every day.
RBI Annual Report-Proof of failure of Demonetisation
So, what was the real reason behind demonetisation? That question has cropped up again when the Reserve Bank of India (RBI) annual report shows that 99.3 per cent of all the high-value currency notes that were demonetized was deposited back. Various government spokespersons rushed to babble out fresh reasons to explain that it was not a complete and utter failure.
The remaining 0.7 per cent cash that has not come back is either circulating in foreign countries (Nepal) or with NRIs who could not exchange it in time. Also, the ever-changing rules in this money exchange system made it really difficult for people to exchange all their money in time. Only a very negligible per cent money was black money.
Obviously, even the government knows that demonetisation was a big failure. The RBI report itself was released quietly, and initially, only a few government spokespersons tried to defend it once the report was released. (They are still trying to do it, though none of their reasons sounds convincing).
There are many aspects of failure of demonetization. So, let’s analyse the failure of demonetization on every point told by the government.
14 Reasons Behind Failure of India’s Demonetization
In the beginning, the government said that it expected at least 30%of the demonetized cash to not return to the banks because according to them, 30%of all cash in India was black money. So, the people who had black money wouldn’t come to the banks to deposit their money. As if they came, the bank management would match their salary records and see that tax hadn’t been paid on that income and they would get caught. That’s why they would either burn their black money or dump it in the river, according to our Prime Minister. But no such things happened. The RBI’s annual report found 99.3% of the money withdrawn from circulation had been returned to banks, indicating either there was less “black money” than expected, or that schemes to launder money were more successful than thought. So, there may be two possibilities for black money-
1. Either, there wasn’t enough black money which was expected by the government.
2. Or people had found new ways of turning their black money into white and subsequently deposit it into the banks
The second possibility is more probable.
Because demonetization had various loopholes which were exploited by people to turn their black money into white.
2.The mathematics of Currency
There was Rs.15.44 lakh crore worth value of the demonetized currency and Rs 15.28 lakh crore worth of currency returned to the banks. So, it is presumed by the public that the remaining Rs.16,000 crore rupees are in the form of black money. But the truth is that a lot of this isn’t black money. It is believed that Rs.3300 crore is kept in Nepal and Bhutan, which the government has been unable to bring back. A lot of this money include the cash held by NRIs, which they couldn’t return back. This money also includes the cash held by poor people, which they couldn’t return back. This money also includes the cash kept in the donation boxes of temples, which they have been requesting the government to take back, but the government is unable to do so.
So, all in all, the thing which was considered to be a surgical strike on black money, couldn’t even recover 0.1% of the black money
After this, it was said that demonetization would have a severe impact on the fake currency. But what happened was that a mere 3-4 says post demonetization, there were images in the market of fake Rs2,000 notes. In fact, up till June 2017, up to 11 crore worth fake currency was detected. And, it is unknown as to how much is undetected. This makes it apparent that there is zero impact of demonetization on fake currency.
4.Lake of Planning
People were given several weeks to exchange their demonetised currency for new notes at banks. But new notes could not be printed fast enough, transportation of notes, non-working conditions on many ATM, policy sparked a months-long currency crunch and many more reasons left tens of millions of Indians cashless or standing in line for hours each day to retrieve small sums of cash.
It was said that there would be an impact on terror funding by demonetization. Demonetisation happened on the 8th Nov, few days after on 19 Nov there was a terrorist attack in Assam on our army. Thus, was so followed by an attack in Kashmir on 22nd Nov. and a huge attack in Nagrota on 29th Nov where 7 army men were martyred. Due to multiple attacks occurring just within a month of demonetization, it becomes apparent that there has been no impact on terror funding due to demonetization.
6.Cashless Economy Graph
They change their agenda and claimed that the purpose of demonetization was to make a cashless economy. This was true that there was an increase in cashless transactions post demonetization as people had a shortage of cash. But as the cash increased in circulation, the people reduced their cashless transactions. This can be seen in this graph, how post demonetization there was a huge spike in the cashless transactions which fell significantly, to values existing before demonetization.
7.Tax collection and no. of taxpayers Graph
It is being claimed that the direct tax collection and the number of taxpayers have increased significantly due to demonetization and these are the major benefits of it. This is true that there has been an increase of 14% in 2016-17 direct tax collection as compared to last year (2015-16). But to claim that it occurred due to demonetization is a very misleading thing because if you see the graphs of previous years, an increase of 14% over the years is not such a big thing. As there was an increase of 14% seen even during the year 2013, which has nothing to do with demonetization.
The same can be observed with regard to the annual increase of taxpayers in this country over the years. The increase this year, is nothing special. But the government has made it special by comparing the values to that of last year and not the years before.
8.The loss in first 50 days:1.28 Lakh Crore
A loss of Rs.1.28 Lakh Crore was faced by the Indian economy in Just 50 days of post demonetization. Indian economy dropped very badly. But we didn’t notice it because we all were standing in huge lines, waiting for our chance to change the notes.
In the first 4 months after demonetization, more than 15 lakh people lost their jobs. The figures suggest prime minister Narendra Modi’s demonetisation policy, which likely wiped at least 1% from the country’s GDP and cost at least 1.5m jobs, failed to wipe significant hordes of unaccounted wealth from the Indian economy — a key rationale for the move. 15 crore daily wage earners lost their livelihood for several weeks. Thousands of SME units were shut down. Lakhs [hundreds of thousands] of jobs were destroyed.” Economist Gurucharan Das said- “The cost to the people was high, and we lost about a year of economic growth by my estimates. And to solve the jobs problem in India you need to grow at about 8% for about 20 years.”
Barely six months after demonetization, India’s Gross Domestic Product or GDP growth rate has slumped down to 6.1 per cent 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 per cent growth as compared to the 7.6 per cent in 2015-16.
11.Cost of Printing
Rs. 21,000 crores, this was the cost of printing the new notes. Rs. 5,000 crores were spent on the printing of new Rs. 500 currency notes post demonetisation.
As per the information provided by Minister of State for Finance in a written reply, as many as 1,695.7 crore pieces of Rs. 500 denomination notes were printed till December 8. The amount spent on the production of Rs. 500 notes were Rs. 4,968.84 crore. The cost incurred is about Rs. 1,293.6 crore for printing Rs.2,000 notes.
Similarly, Rs. 522.83 crore has been spent on the printing of 178 crore pieces of Rs. 200 notes.
So, accumulating the loss to GDP, loss of Jobs, the loss of Rs.1.28 crore and the cost of printing new notes come down to an estimated cost of Rs 5-6 lakh crore.
12.Death of people
More than 150 people had died due to demonetization. Some people died standing in lines and some died in front of hospitals as they had stopped accepting cash. These are people who cannot become alive again. Those who say that demonetization was a temporary problem which will lead to a long to a long-term solution. The deaths of these people were not temporary. They are not going to become alive in the long term.
Digital transactions have grown, but the RBI found the value of banknotes in circulation had also increased in the past year by 37.7%. Cash continues to be king in India and still reigns supreme for payments across the country with digital payments have failed to sustain their growth rate after demonetization. A USAID-Intellecap study has found that the level of cash in circulation is back to its pre-demonetization levels.
The situation is more intense in rural India, where a preference for cash-only transactions across the rural value chains has been noticed, largely due to the inter-connected nature of the rural economy.
14.The Tax Data Collection argument
An example of this is the claim by some people that the positive effect of demonetization has been the significant amount of data collected by the government. They have come to know about the tax defaulters and more than 18 lakh tax defaulters have been identified. And that an action will be taken against them. It remains to be on seen on how much action will be taken against them otherwise this reason will also be a fail like the other ones.
By using common sense anyone can predict that the Income-tax department used to raid people before demonetization as well as now. The rate of raids cannot increase as the no. of people working in the Income Tax Department is the same. So, it is unlikely that all the black money will be recovered from such 18-lakh people.
So, in the end, we can safely say that demonetization was a not only a failure but a big disaster of Indian finance which affected Indian economy, India GDP growth and more than anything the life of every India. But instead of asking questions to our government we all are supporting any political party blindly.
It’s time to raise our voice, ask a question and get the best political services from every political party.
Because no government has the right to play with the life of any citizen.
Has there been any significant change in the life of ordinary citizen post demonetization? Apart from carrying some really colorful cash?
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