Today marks the fifth anniversary of the unprecedented and self-inflicted disaster of demonetisation unleashed by the Narendra Modi government on hapless Indians. The Tuglaqian-adventure, unparalleled in global financial history, imposed by Modi on the night of November 8, 2016, brought the economy to its knees and imposed unending misery on millions. For months after the announcement, Indians queued at banks and ATMs desperately, seeking to draw their own money; many died of sheer exhaustion as a result of the effort.
Five years later, the agonising experience is seared into the consciousness of Indians, even as the Modi regime has precious little to show for the massive exercise.
The demonetisation of the currency notes bearing the highest value — Rs 500 and Rs 1,000 — resulted in the overnight evaporation of 86% of the currency value in circulation. In effect, those holding the cash could not use it. And, millions of Indians found that they could not exchange the now worthless notes for new ones simply because they were nowhere to be found. Meanwhile, the troika that launched the move — the prime minister, the finance minister and the Reserve Bank of India (RBI) governor, whose remit it is to manage the national currency — simply had not made any arrangements before embarking on the unprecedented adventure.
Source: RBI Annual Report (2020-21)
As the economy came to a grinding halt — unprecedented for any non-wartime economy anywhere in the world — the Modi regime kept shifting the goalposts. It first said the move was aimed at bringing in black money, a key promise it made to the electorate on its way to power in the 2014 elections. Later, as it struggled to replace the value of cash in circulation, it said the move was aimed at triggering a digital transformation, even if by force compelling people to opt for digital payments instead of cash. When this flopped, simply because cash provided the underlying basis for most Indian livelihoods, particularly for people at the lower end of the social scale, it moved the goalpost yet again. It finally said that the replacement of cash by more formal payment systems was aimed at modernising the Indian economy.
Five years on, cash still plays a pivotal role, especially for the informal economy that sustains the livelihoods of most Indians.
In the days following the fiat, the troika dithered, revised, reviewed and modified the terms on which people could access their own banks. In ten days it became plain that the administrative elite had not planned for the consequences; it was exposed as being utterly callous, insensitive and ignorant about how ordinary Indians earned their livelihoods.
On the eve of demonetisation the Indian currency regime — like all others worldwide — had a structure that was based on the logic that it must aid the flow of liquidity in the economy. In such a regime various denominations are structured in a manner that facilitates this. The central axis of the Indian currency system in 2016 was clearly the 500-Rupee note, which accounted for almost half the value of all notes in circulation. Its primary function was to not only provide immediate liquidity but also act as a store of value for those who needed it at short notice. Clearly, the Modi regime’s acolytes’ suggestion that the 500-Rupee note was the refuge for ill-gotten wealth clearly demonstrated how far removed from Indian reality they were. Who was to tell them that the note, which was fairly easily convertible, provided a convenient option to most Indians?
The 1,000-Rupee note performed a slightly different function. It provided liquidity for relatively high-value transactions, especially for small and informal businesses. In an economy in which half the national income is generated by informal activities, relatively high values do not necessarily translate to high incomes.
For instance, consider a small fertiliser trader in a village or a small town selling about 15 bags (50 kg) of fertiliser a day. He/she may register a daily turnover of about Rs 15,000. For such a trader the profit would only be a small fraction of the turnover. The 1,000-Rupee note was a convenient option for such transactions. The dim-witted understanding that dealings in relatively high-value denominations are necessarily suspicious of illegal activity demonstrated a pathetic understanding of the nature of the Indian economy and the role of currency in it.
If the decision to replace the 500-Rupee note with a fresh one was witless, the move to abandon the 1,000-Rupee note and replace it with the new 2,000-Rupee note was positively irresponsible, as has been proven by events since then.
Every currency across the world regime has a graded structure that facilitates the flow of liquidity in the economic system. In the earlier system, which the Modi regime uprooted overnight, the highest currency held a value that was double that of the 500-Rupee note. The decision to replace this with the 2,000-Rupee note now meant that the value of the highest denomination was now four times that of the next in the hierarchy. This meant that although its use as a store of value was higher, its liquidity was vastly diminished. Moreover, as a result of the increased gap between the values of the two highest denominations, more 500-Rupee notes would be needed in order to support the 2,000-Rupee notes. This is what explained the extreme reluctance of people to accept or keep the new pink notes, what in common parlance is referred to as the problem of keeping “change” in order to transact in 2,000-Rupee notes.
Moreover, given the context of low incomes in India, the new pink note was not what Indians wanted. Unmindful of this, and solely obsessed with desperately and quickly pumping back value of currency into the financial system, the Modi regime printed more 2,000-Rupee notes, while neglecting the production of notes of other denominations, including the new 500-Rupee note. Above all, who was to tell the troika that the new 2,000-Rupee note defeated the stated purpose of removing the 1,000-Rupee note because it was even more efficient as a store of black money, the supposed reason for the regime embarking on the misadventure? [For an excellent primer on demonetisation and black money in India read Notebandi: Demonetisation and India’s elusive chase for black money (Edited and introduced by Prof. R. Ramakumar of the Tata Institute of social Sciences, Mumbai.] In any case, in the weeks and months after demonetisation, as the Indian currency printing machinery struggled to keep pace with demand, the humble 100-Rupee note was pressed into service; anecdotal evidence from bank employees then suggested that beleaguered banks (mostly public sector banks) desperately put back into circulation even soiled notes that were on their way to the incinerator.
Five years after demonetisation it is evident that the structure of the Indian currency regime is back where it was before November 2016. The two highest denominations accounted for 85.6 per cent of the value of all currency in circulation in March 2021; on the eve of demonetisation they accounted for 86 per cent.
Soon after demonetisation the regime desperately printed 2,000-Rupee notes, unmindful of the misalignment it would cause to the array of currencies in the system. And then, in order to repair the damage, it withdrew a large volume of these notes. Thus, between March 2019 and March 2021, the RBI pulled out of circulation 1.68 lakh 2,000-Rupee notes. The denomination accounted for 31.2 per cent of the value of all currency in circulation in 2019; by 2021 it had fallen to 17.3 per cent. Given that the life of higher value currency notes is considerably higher than smaller those of smaller denominations, this represents an utter waste of resources, quite apart from putting an entire population through the wringer.
One of the abiding myths of demonetisation has been the notion that all Indians, rich as well as poor, had to face its miserable consequences. Nothing could be farther from the truth. For instance, since demonetisation immediately followed the Kharif harvest, peasants across the country are forced to sell their crop at a discount; in fact, in many parts of the country, there were reports that peasants insisting on being paid in the new currency either had to wait or accept the sale of their crop at a significant discount.
Moreover, traders — and even politicians, in Karnataka, for instance — bought produce at a discount from peasants. Meanwhile, small and medium enterprises, and informal economic activities of all hues, were squeezed out of business when cash disappeared. All this resulted in a massive transfer of wealth and resources from the poor into the hands of the wealthy. In effect, demonetisation promoted the concentration of wealth in a manner and scale that would not have been normally possible. Perhaps that explains why the tiny section that gained from it regard it as a “masterstroke”.
Five years after the deadly strike, there is no evidence that the machinery that churns out black money has fallen silent; cash remains as relevant as before, despite the growth of digital payments; and the Indian economy remains mired in a deep crisis. Perhaps it is worthwhile to see demonetisation, the hurried and disastrous implementation of the Goods and Service Tax (GST) in 2017 and the harsh lockdown following the onset of the pandemic in 2020 as a continuum — a series of disasters that the Modi Government engineered in order to secure the interests of a few at the expense of the many.
The writer is former associate editor, ‘Frontline’, and has worked for The Hindu Group for over three decades. The views are personal.