Editorial: Cash remains the king

Five years on, demonetisation neither punished the corrupt nor did it help create a more equal society

No other measure in recent history, packaged as a radical reform, has failed as spectacularly as the demonetisation did. As one looks back at the implications of the move imposed on the nation exactly five years ago, it is clear that the note ban could not achieve any of the avowed objectives — unearthing black money, eliminating counterfeit currency and choking terror funding. In fact, it dealt a deadly blow on the common man and crushed the cash-dependent informal sector. Demonetisation had aggravated rather than addressing the inequality in society. While the purpose of invalidating the higher currency was to promote digital payments and reduce the cash component, the latest data shows that cash remains the king of India’s economy. Though the government had launched its sudden move to cull out black money by weeding out currency notes of Rs 500 and Rs 1,000 denomination, the notes in circulation in value terms have increased by 64% in the last five years. According to data released by the Reserve Bank of India, notes in circulation in terms of value went up from Rs 17.74 lakh crore on November 4, 2016, just four days before demonetisation was announced, to Rs 29.17 lakh crore on October 29, 2021. This shows that there has not been much impact on cash transactions. Though the intent behind banning the high-value currency notes was lofty, the consequences turned out to be an economic misadventure.

The sudden invalidation of high denomination currency notes on November 8, 2016, virtually created a nightmare for people for several months. The economic activity was severely affected and what the ruling party thought was a masterstroke turned out to be a disaster. It rendered millions jobless and subsequently contributed to the liquidity crisis among non-banking financial companies and infrastructure lenders. A major flaw in the demonetisation idea was the assumption that black money would automatically mean hoarding piles of cash. It must be pointed out that the ill-gotten wealth can be held in a variety of forms like under-valued inventory, benami properties or stashed away in tax havens abroad. The result is there for all to see: demonetisation neither punished the corrupt nor did it help create a more equal society. It did not lead to universal income transfer. It did not weaken terror. According to the RBI data, more than 99% that was invalidated money came back into the banking system. Of the Rs 15.41 lakh crore worth invalidated notes, notes worth Rs 15.31 lakh crore have returned. After realising that the move was an economic disaster, the BJP spin masters tried to shift the goalposts and put forward an argument that it was a step towards greater formalisation and digitisation of the economy. But, cash continues to dominate in an economy largely driven by the informal sector.

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