The RBI introduced new Rs 500 and Rs 2,000 notes after demonetising old Rs 500 and Rs 1,000 notes on November 8. The Reserve Bank of India (RBI) disclosed (August 30) that almost 99 per cent of Rs 500 and Rs 1,000 currency notes which were withdrawn from circulation on November 8, 2016 has returned to the central bank.  As on November 8, 2016 — the day demonetisation was announced — there were 1,716.50 crore pieces of Rs 500 and 685.80 crore Rs 1,000 notes in circulation. RBI data says old notes worth Rs 15.44 lakh crore were there in the market, out of which 15.28 lakh crore have been received by the bank. This not only confirms what the government’s critics had been pointing out about the weak economic rationale for demonetization, but also raises questions about the overall gains and the impact on the economy, especially the informal sector, because of the disruption it caused.

RBI data states that out of Rs 15.44 lakh crore worth of currency notes that were taken out of circulation, Rs 15.28 lakh crore have returned to the system and around Rs 16,000 crore is yet to be deposited back to banks. RBI report also says that about 8.9 crore units of the demonetised Rs 1,000 notes worth Rs 8,900 crore, had not come back into the system. There were 632.6 crore pieces of Rs 1,000 currency notes in circulation on the day of demonetisation. This reveals that just  1.4 per cent of Rs 1000 notes did not return after demonetisation.

According to RBI report, in value terms, the share of 500 and above banknotes, which had together accounted for 86.4 per cent of the total value of banknotes in circulation at end-March 2016, stood at 73.4 per cent at end-March 2017. The share of the newly introduced Rs 2,000 notes in the total value of banknotes in circulation as at March-end was a little more than 50 per cent.

Why demonitisation was done?

Prime Minister Narendra Modi had announced the demonitisation move under the pressure from the opposition parties which was seeking concrete action against much controversial black money issue in India and asking for bringing Rs, 1 lakh in every Indian’s account as promised by him during the election campaign. Elections in the offing in many states after a few months including the decisive state of Uttar Pradesh, the government undertook a poorly designed demonitisation policy in haste to pre-empt the opposition parties’ criticism leading to lot of inconvenience to common man and small business while about 100 people lost their lives in panic.

Effects of demonitisation

There is no doubt that flow of FICN was curtailed in the beginning, digital mode of transaction increased and economic activities were prompted to come under tax net. The adverse effects of demonitisation took place through both supply and demand shocks. The producers in India’s MSMEs were mostly in the habit of cash payments for their inputs and labour. Their productive activities suffered. Even in the construction and real estate sector demonitisation had adverse effects.  Consumers also curtailed or postponed their purchase of consumables and durables due to lack of cash and uncertainty. Demonetisation, which was done to crack down on black money, significantly affected India’s GDP growth, but with almost all of the money now being accounted for, there are doubts if the government’s action was effective. Demonetisation’s long-term impact on the Indian economy is still debated.

Government’s Defense

Finance Minister Arun Jaitley held a press conference and defended government’s demonetisation exercise, saying the real objective of demonetisation was less-cash economy, digitisation, increased tax base and crackdown on black money. In the long run, there will be more formalisation of the economy due to demonetization. He suggested that just because the money is back with the RBI does not mean that black money hoarders have not been held accountable.

Opposition’s criticism

Nobody would disagree with the perceived benefits pointed out by the FM, but the question is about the haste and poor design of the demonitisation policy and its stated goal to start with. Political compulsions certainly overpowered economic rationality, and finally common people suffered. The former Prime Minister had called the decision a “monumental mistake” Taking note of RBI’s data on demonetisation, former Finance Minister P Chidambaram tweeted, “RBI ‘gained’ Rs 16000 crore, but ‘lost’ Rs 21000 crore in printing new notes! The economists deserve Nobel Prize.” According to various reports, Parliament Standing Committee on demonetisation has accused RBI Governor Urjit Patel for not sharing demonetisation data with the committee earlier. The committee severely indicts government’s handling of demonetisation while saying people can’t be coerced to go digital. It has also raised concern on cyber security.

Cost of printing new money soared

It is also important to be informed about the cost of printing new money. It was estimated in Novemeber 2016 itself that replacing all the Rs. 500 and Rs. 1,000 denomination notes with other denominations  could cost the Reserve Bank of India at least Rs. 12,000 crore, based on the number of notes in circulation and the cost incurred in printing them. The Reserve Bank of India (RBI) spent a whopping Rs 7,965 crore to print new currency notes from July 2016 to June 2017, a jump of 133 per cent against Rs 3,421 crore in the same period of the previous year, in the wake of demonetisation of Rs 500 and Rs 1,000 notes. According to the RBI, the surge in expenditure during the year was on account of change in the production plan of printing presses due to the introduction of new design notes in higher denominations as well as the requirement of larger volume of notes for replacement of the demonetised currency. Furthermore, in order to ensure availability of banknotes across the country at the shortest possible time subsequent to the demonetisation, banknotes had to be frequently air-lifted from the presses to the issue offices of the Reserve Bank as well as directly to currency chests wherever feasible, which partly contributed to the increase in the cost of distribution of banknotes,

Who is to blame?

 In fact that government started to defend its ill conceived demonitisation policy just after a few days of its implementation by adding many other goals such as cutting flow of fake Indian currency into the hands of  terrorists, digitalization of economic transactions and holding accountable all those who keep unaccounted savings  in informal channels. Opposition had then said that the government is changing its goal posts to defend its poor designed policy just for political benefit. In fact in this whole episode everybody has his or her own share of blame. Opposition parties knowingly created pressure on the government on the issue of black money, so much so the government had to offer explanation that the promise of Rs 15 lakh in every Indian’s account was an electoral jumla (an electoral slogan). The intellectuals and experts who gave this advice to the government without proper research and study on different forms of black money are equally to be blamed. Cash was certainly not the major repository of black money as it comes out now. And no less blame lies on media, which for unknown reasons, didn’t make clear to the people the rationale and expected efficacy of the policy of demonitisation in curbing black money, which is generally channeled into real estate, tax  havens and buying and hoarding precious metals rather than keeping cash in sacks as pointed out by CPM leader Sitaram Yachury. Mamta Benerjee was another opposition leader who opposed this move from the beginning, but media did not give much importance to her criticism. The Chief Mnister of Bihar in lure of taking the share of credit for curbing black money sided with demonitisation policy without giving fair amount of thinking, probably because he had his own political designs. But people who just believed that government has gone for demonitisation to bring black money of corrupt and rich people back into the system for the benefit of the poor must be repenting in being misled to vote the BJP in absolute power in Maharashtra and UP, which government flaunted as endorsement of demonitisation policy. The change of governments is the sign of democracy and people’s power, but they should exercise their votes by making an educated opinion ,and not by what is being pervaded in the social media by the political parties. Ultimately it is people who bear the cost of such ill conceived policies!

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