Can the Demon of Demonetization return to haunt us again?
Claims are being made that the government withdrew Rs 2000 notes two and a half years ago, which can be considered as a kind of 'Demonetization.'. So let us revisit the Note-Ban on the 1st week anniversary of Demonetization's 6th year anniversary.
The Objective
The Indian Demonetization of 2016, intended to eliminate black money and counterfeit cash, has been called into question in the economic and political discourse due to the suffering experienced by millions.
The country's public largely assumed that a significant amount of the banned currency would never be recovered because the owners of the black money may destroy them to avoid prosecution. And, proving the assumption right, the Government of India lost 1.4% of the banned currency in transition.
While the demonetization strategy is dubbed a failure, let's see if the stated objective of the move were achieved or not -?
Ending corruption and managing black money
With the ultimate goal of Ending corruption and black money in the economy, Prime Minister Narendra Modi announced the plan to eliminate Rs. 500 and Rs. 1,000 denomination notes on November 8, 2016. But Did Modi achieve the target of ending the black money economy?
Data from the Reserve Bank of India (RBI) show that more than 99 percent of invalidated money was pumped back into the banking system. There were invalidated notes worth Rs. 15.41 lakh crore and notes worth Rs. 15.31 lakh crore that was returned.
The government had initially projected that the effects of Demonetization would be sufficient to eradicate at least Rs 3–4 lakh crore of black money from outside the banking system. However, in February 2019, Piyush Goyal, the finance minister at the time, informed Parliament that Demonetization had helped recover Rs 1.3 lakh crore in black money.
This Data shows that Demonetization failed to uncover black money in the system. Meanwhile, recoveries of black money continue.
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Eradicating fake currency notes
The second goal of Demonetization - Eradicating fake currency notes- also appears to have failed. The Reserve Bank of India (RBI) announced in its annual report released on May 27, 2022, that counterfeit Indian currency notes grew 10.7 percent in the fiscal year ending March. The central bank found a 101.93 percent spike in fake Rs 500 notes, while fake Rs 2,000 notes surged by more than 54 percent.
According to the RBI data, counterfeit notes of Rs 10 and Rs 20 increased by 16.45 and 16.48 percent in FY22. Fake Rs 200 notes increased by 11.7 percent, while the fake notes of Rs 50 and Rs 100 fell by 28.65 and 16.71 percent, respectively.
Promoting a cashless economy by pushing digital transactions
Another significant goal of Demonetization was the establishment of a cashless economy. But Cash has yet again proven to be king in the post-note-ban years. According to RBI data, cash in circulation grew to Rs30.88 lakh crore on October 21, 2022, up from Rs17.7 lakh crore on November 4, 2016.
However, Digital payments are on the rise. According to RBI data, transactions over the Unified Payments Interface (UPI) reached a record high of Rs 12.11 lakh crore in October. In terms of volume, UPI set a new high in October with 730 crore transactions.?
According to a study by the State Bank of India, the percentage of currency in circulation (CIC) in payment systems has dropped from 88% in fiscal 2015–16 to 20% in 2021–22, and it is predicted to drop even lower to 11.15% in 2026–2027. As a result, the share of digital transactions is constantly growing from 11.26 percent in 2015–16 to 80.4% in 2021–22 and is predicted to reach 88 percent in 2026–27.
Demonetisation was a 'radical' step, though somewhat not entirely in the ways planned. After six years, it is time for the government to release a report outlining what this decision accomplished and what it did not.
Let us look at Demonetization from the perspective of The Objective, The Outcome, and The Vision in a 3 part series. In the next Article, I'll share The Outcome of Demonetization.?
Stay Tuned.