Five Years of Demonetisation: Where are we now?
By: Sashwata Saha
November 8, 2021, marked five years of demonetisation in India.
On this day in 2016, the Prime Minister announced that from midnight, Rs 500 and Rs 1,000 notes would no longer be legal tender. Though Indians were given the opportunity of redeeming the full value of their money held in this form, they could do so only by depositing the notes in a bank or Post Office savings account.
The total value of the currency affected by demonetisation was 85%. A former US Secretary of the Treasury said this was by far the “most sweeping change in currency policy that has occurred anywhere in the world in decades”.
What has changed in the Indian economy in these five years? How many of these changes are linked to demonetisation?
Not so much of a surgical strike on illegal cash
While demonetisation was described as a policy boost to promote digital payments, the original policy had very different stated targets. The most significant promise of demonetisation was that it would purge unaccounted cash in the system, with those hoarding forced to deposit it in the banks.
The Prime Minister’s speech announcing the policy said: “Which honest citizen would not be pained by reports of crores worth of currency notes stashed under the beds of government officers? Or by reports of cash found in gunny bags.”
The implicit idea was that those who had unaccounted cash with them would be forced to either declare it to the tax authorities or just get rid of it. Thus, many described demonetisation as “a sort of surgical strike against corruption.”
Even economists, such as Soumya Kanti Ghosh, the chief economic advisor of India’s largest bank, the State Bank of India, had supported the move. Unfortunately, though, such hopes were extinguished very soon.
After the demonetisation, the preliminary analysis of data by the Union finance ministry regarding deposits made by people in old currency presents a revealing picture. Between November 8 to December 30 2016, deposits between Rs 2 lakh and Rs 80 lakh were made in about 1.09 crore accounts with an average deposit size of Rs 5.03 lakh. Deposits of more than 80 lakh were made in 1.48 lakh accounts with an average deposit size of Rs 3.31 crores.
By the time the Reserve Bank of India came up with final figures about the amount of demonetised currency returned to banks, the figure was more than 99%.
Cash usage is at an all-time low
Currency in circulation was 12.1% of India’s nominal GDP in 2015-16. However, it plummeted to 8.7% in 2016-17 as the banking system struggled to put cash back into the system after demonetisation. Since then, this ratio has climbed steadily, and it reached 12% in 2019-20.
Digital payments have increased significantly since demonetisation (more on this later). Whether or not India has become a cashless economy post demonetisation is a different question.
Take, for instance, the housing sector.
Cash transactions in the housing market have reduced by 75-80% since demonetisation. This is because buyers no longer buy flats or houses to get rid of black money. However, the component is still finding its way into property transactions in smaller towns and peri-urban areas, an analysis by Anarock reveals.
“Overall, the use of black money in Indian housing has reduced by at least 75-80 percent,” said Anuj Puri, chairman of the Anarock Group, to MoneyControl. “A notable impact of the triple whammy of DeMo, RERA, and GST was a significant deceleration in new property launches. Our data shows that in the years preceding DeMo, the top seven cities saw approximately 16.15 lakh new (housing) units launched while the post-DeMo period saw 9.04 lakh units launched – a drop of nearly 44 percent between the two periods.”
Currency circulation has finally reached an all-time high of 14.5% in 2020-21. The latest number is more a result of the pandemic’s economic disruption; 2020-21 saw an annual contraction of 3% in India’s nominal GDP, which pushed up the cash-GDP ratio, than a sudden increase in preference of cash in the Indian economy.
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