1. 08 November 2016 was a red letter day in the history of Indian Economy. In a swift and sudden announcement, the Prime Minister announced the demonetization of the erstwhile 500 and 1000 rupee notes from midnight that evening. The announcement caught the entire nation by surprise and the resultant pandemonium lasted for several months due to the severe disruption in the economic activity of the country which till then has largely been cash-based transactions in every sphere of the financial spectrum.
2. This move was initiated for the following possible reasons:-
a) To eradicate black money.
b) To flush out fake money in circulation.
c) To starve the terror funding.
d) To widen the tax base by forcing people to deposit money in their accounts using PAN details.
e) To encourage digital transactions in every financial activity so as to enable a cashless and transparent society.
3. THE PROCESS
a) The announcement was made at 2000h on 08 November.
b) With effect from midnight 500 and 1000 rupee notes would cease to be legal tender.
c) The old invalid notes could be exchanged for new 2000 and 500 rupee notes over the next fifty days.
d) Due to the spurt in demand initial exchange was restricted to 4000 per day. So was the withdrawal from accounts.
e) On humanitarian grounds hospitals, medicine shops and railway stations were allowed to accept the old tender.
f) People were allowed to deposit the money into their accounts but with PAN card details and on own name.
4. CONSEQUENT RESULT
Apart from the envisaged objectives of this exercise a lot of actions by the public took the Government by surprise. These are:-
a) People converted a lot of old unaccounted old notes through permissible outlets namely.
• Pharmaceutical shops.
• Rail reservation counter by making bogus reservations and canceling them to regain legal tender.
• Jewelers were flooded with backdated purchases for huge amounts of jewelry to regularize the large amounts of unaccounted demonetized currency.
b) A large number of senior public sector bank officials compromised institutional integrity and their own conscience to illegitimately convert large amounts of the currency of vested parties for personal pecuniary gains.
5. The demonetization exercise suffered from some intrinsic flaws which took away the sheen from the desired impact. These are
a) The quantum of notes printed was restricted initially to maintain surprise and the subsequent rate of printing could not match the demand.
b) The Automatic Teller Machines (ATMs) was not calibrated for the new 2000 rupee and 500 rupee notes. Hence could disburse only 100 rupee denomination which made the problem more acute.
c) The rate at which the massive network of ATMs were reformatted for the new currency was very slow and painstaking.
d) The bank staff was at the receiving end of the customer wrath putting them under tremendous stress and strain.
THE SPECIFIED BANK NOTES (CESSATION OF LIABILITIES) ORDINANCE 2016 was issued on 28 December 2016 ceasing the liability of the Government for the banknotes and also imposing fines on people found carrying out transactions or holding more than ten of them after 30 Dec 2016. Fuel pumps, government hospitals, railway and airline booking counters, state-run diaries and ration stores and crematoriums were allowed to accept 500 and 1000 rupee notes until 12 December 2016.
Historically speaking Demonetization exercise has been carried out in our country on two earlier occasions, once in 1946 just before independence and the second in 1978. The aim on both occasions was to eradicate Tax evasion by neutralizing the unaccounted cash that was stashed away outside the system. In 1978 denominations of 1000, 5000 and 10000 (highest denominations ever) were declared void to curb fake currency and unaccounted money which was fuelling a parallel economy, effectively derailing the Government programmes and financial policies.
The exercise was intended as a bold maneuver even at the cost of massive public outcry and severe criticism from renowned economists. There were arguably better options to tackle the intended targets. Destabilization of a steady economic growth which resulted in the drop of GDP was perceived as demonetization failure even if there were other economic turbulence which may have caused the drop.
9. To encourage digitalization and move towards cashless economy; keeping 500 rupees as the highest denominations would have yielded better dividends. Most advanced economies of the world have 100 dollars and its equivalent as the highest currency denominations in circulation. In such situations turning to digital and cashless transactions is axiomatic and would have enhanced transparency in the economic system.
10. Whatever are the pros and cons of this exercise; the enormous expenditure incurred to print new currency and destroy the old ones have definitely impacted the economic trajectory which in the current scenario is something our country could have avoided. In a situation such as this surrendering political expediency at the altar of NATIONAL INTEREST would have been more financially prudent.