While upholding the demonetisation decision as legal the judges said they were only pronouncing upon the legality and constitutionality of the process of decision making and not the economic benefits of demonetisation. The dissenting judge, Justice Nagarathna also underlined that “this court does not base its decision on the legality of a legislation qua the effectiveness in achieving the stated objectives.”
But as much as the legality, the economic impact or effectiveness of the policy also matters to the country and that’s what this piece seeks to measure. Did DeMo achieve anything for the economy? The Prime Minister outlined three objectives, (i) “to break the back" of corruption and black money, (ii) to end the circulation of fake currency and (iii) to end terrorist financing.
Let’s take these one by one. To break the back of corruption and black money. Connected with this, proponents of DeMo argued there was too much cash in the system and DeMo was intended to reduce cash in circulation and replace it with digital payments.
The government had expected that 25-35 percent of the large denomination notes would not come back to the banks because they would be unaccountable or black money. The Attorney General (AG) said as much to the Supreme Court in the end of 2016, when the process was still under way. By the AG’s standard, the goal of eradicating black money was clearly not achieved. RBI’s 2017-18 annual report pointed out that of the 15,440 billion rupees of 500 & 1000 rupee notes that were demonetised, 15,310.7 billion rupees or 99.2 percent had been returned to RBI.
The RBI board members had been right. The minutes of the RBI board meeting of Nov 7 (as revealed by RBI to an RTI applicant- Venkatesh Nayak of Indian Express) record that a few board members had pointed out that the objective of black money eradication may not be achieved by demonetisation since such money is normally held in landed assets.
Then what about circulation of cash in the system. One justification was that cash in circulation as a percentage of GDP had been rising in the months prior to DeMo on Nov 16 and cash is a mode of paying bribes. Here’s the cash to GDP ratio before and since that year
Currency in circulation as % of GDP:
| Mar-16 | 11.60% |
| Mar-17 | 8.21% |
| Mar-18 | 10.30% |
| Mar-19 | 10.84% |
| Mar-20 | 11.70% |
| Mar-21 | 13.90% |
| Mar-22 | 12.82% |
| Sep-22 | 11.74% |
#Source: RBI Annual Reports
The data proves cash to GDP did not recede despite DeMo. It resumed growing almost immediately.
The second goal was ending fake currency. Data culled from the RBI annual report since 2016 is as follows:
Number of fake notes as % of all notes in circulation:
| Mar-15 | 0.00071% |
| Mar-16 | 0.00071% |
| Mar-17 | 0.00075% |
| Mar-18 | 0.00051% |
| Mar-19 | 0.0003% |
| Mar-20 | 0.00025% |
| Mar-21 | 0.000003% |
| Mar-22 | 0.00017% |
The reply to the Indian Express RTI revealed that board members had recorded that the number of fake notes in the country is not at all large. Also, the reduction in fake notes started not after DeMo in 2016, but by 2018-19 on account of the new series of notes with extra security features that RBI introduced in 2017.
The third and important goal was the reduction of terror financing. Media reports pointed out, even in the year after DeMo, that terrorists had been caught with the new 2000-rupee notes. But more to the point, terror itself didn’t decline immediately after November 2016. Here’s some data collected by the South Asian Terrorism Portal; a portal started by IPS officer KPS Gill
| Year | No. of terror events | No. of civilians killed | No. of military personnel killed |
| 2016 | 112 | 14 | 88 |
| 2017 | 163 | 54 | 83 |
| 2018 | 206 | 86 | 95 |
| 2019 | 135 | 42 | 78 |
| 2020 | 140 | 33 | 56 |
| 2021 | 153 | 36 | 45 |
| 2022 | 151 | 30 | 30 |
The data seems to suggest terrorist activities didn’t decline in the immediate aftermath of DeMo; but if the portal’s data is to be believed, the number of casualties appear to have fallen after the abolition of article 370 and the conversion of Kashmir into a union territory.
In short, the stated goals of DeMo have not been achieved. Or rather, if some of these goals are in sight - like less-cash society - these are being achieved by other mechanisms like UPI.
DeMo may have pushed the economy towards more formalisation and hence improved tax collections, but the formalisation of the economy was achieved more peacefully and systematically through GST. Against any minor advantage of formalisation it may have achieved, deMo actually slowed down the economy for a few quarters. Witness the GDP growth trend in the immediate aftermath of Nov 2016.
GDP growth (%)
| Apr-June 2016 | 8.3% |
| July-Sep 2016 | 7.2% |
| Oct-Dec 2016 | 6.9% |
| Jan-Mar 2017 | 6.0% |
| Apr-June 2017 | 5.6% |
| July-Sept 2017 | 6.1% |
The financial system was hurt even more: the sudden and vast increase in bank deposits led to a crash in borrowing rates which in turn led to euphoric lending to and by NBFCs; By 2018 the financial system started facing a string of NBFC defaults and collapse. Of course, many were guilty of fraud as well, but the easy money in 2017 clearly exacerbated the problem.
The court may be right that DeMo was not ultravires the constitution or the RBI Act. Ironically, DeMo turned out to be a legally unleashed blunder on the economy.
(Edited by : Sangam Singh)
First Published: Jan 5, 2023 11:05 AM IST
