ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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Revealing the Demonetisation Debacle

RBI’s recent estimates of returned specified bank notes spill the beans about the efficacy of the note ban.


The revelation in the 2017–18 Annual Report of the Reserve Bank of India (RBI) that 99.3% of the specified bank notes (SBNs) have returned from circulation has put an end to the current government’s fanciful propaganda of demonetisation being successful in curbing black money. This is not the first time that the RBI has put out the data on returned SBNs. Earlier, in December 2016, when it was revealed that out of a total of ₹15.42 trillion worth of demonetised notes, ₹12.44 trillion had returned to the banking system, the government had refuted that these figures were inflated, possibly because the figures challenged the government’s own forecast of ₹3–₹5 trillion worth of non-returnable black money in the economy.

The RBI, simultaneously, is in an embarrassing position regarding the efficiency of its system. Just a year ago, it had disclosed that an “estimated value of SBNs received as on 30 June 2017 is ₹15.28 trillion” in its annual report. And, now, to please the government and the public at large, it is claiming that the “humungous task of processing and verification of SBNs” has been successfully achieved,” that too after almost two years. And, what is the improvement in the estimates of SBNs returned? A mere 0.2%, or, ₹15.31 trillion against ₹15.28 trillion, estimated a year ago. And, how much of high-denomination currency notes have finally not returned? Only ₹0.11 trillion (or 0.7% of the returned SBNs).

The government’s knuckles are thus badly smacked, though it is nonchalant about the gross embarrassment it has faced. Meanwhile, the RBI’s embarrassment arises from a much larger issue. The whole exercise of demonetisation was done in the most undemocratic manner, disrespecting matured opinions of institutions. Former RBI Governor Raghuram Rajan has gone on record to say that he had conveyed his opposition to any such adventures a year earlier. Similar opposition came from all other previous governors, too. Also, the RBI records are full of analytical works showing that richer households keep over 90% of assets in physical form. Historically, the central bank has been resistant to governmental pressure for demonetising high-denomination notes because of the same reason. But, now its perspectives are influenced by the proclivities of the government of the day, which seems to despise any kind of analysis that requires more intellectual depth.

Demonetisation exercises, erstwhile, had targeted such high-denomination notes that constituted only 0.6% or so of the total currency in circulation. In the current case, where over 86% of the currency was being demonetised, it must be backed up with substantial intellectual exercises on issues like household currency-holding propensities and the country’s economic structure. In 2017, when the “currency in circulation” had a forced fall of nearly 20% due to demonetisation, leading to a fall in currency–gross domestic product (GDP) ratio to 8.8% from 12.2% in the previous year, the RBI proclaimed that “At this level, India’s currency to GDP ratio compares well with a host of advanced and emerging market economies.” In contrast, empirical evidences brought out that the country’s currency propensity exceeds that of both the emerging as well as advanced markets, given the predominance of unorganised enterprises and informal sector households in the Indian economy.

According to the Sixth Economic Census (2013), of the 454 lakh non-agricultural establishments, 92% belong to private unincorporated proprietorships and partnerships, and other small private units. Likewise, of the total workforce, over 92% belong to the informal category. Even in such an environment, and under the pressure of transition to a “less-cash society,” “currency in circulation” grew by 37% in 2017–18 and the currency to GDP ratio increased from 8.8% in 2016–17 to 10.9% in 2017–18. This resilience is perhaps inherent in India’s economic structure. Meanwhile, the RBI with its changed stance tries to portray it as a new phenomenon of revival bringing India to “being amongst the highest levels of currency usage in peer emerging market economies (EMEs) and advanced economies (AEs).”

Appreciation of the country’s economic structure and the dynamics of household behaviour could have led the authorities to realise the intensity of damage that such a reckless exercise would have inflicted. Apart from the anecdotal evidence put out by the media and intellectuals on the massive suffering that the citizenry at large have faced due to losses of output, jobs and incomes, there are no systematic estimates of the real impact of the note ban. A plausible reason could be that the country’s statistical machinery does not capture data on the informal economy on a regular basis. For the estimation of GDP in the informal economy, indicators of the formal economy are used. For instance, when the Q1 growth rate of 13.5% in the manufacturing sector in 2018–19, as against (–) 1.8% in 2017–18, is highlighted, it is said that the GDP of the quasi-corporate and unorganised segment “has been estimated using IIP of manufacturing.” Therefore, it is wrong to flag the GDP growth as an indicator of growth in the informal economy.

When the objectives of arresting black money have not been achieved, it appears bizarre how the purpose of demonetisation is shifted to containing of terrorism and Naxalism, closure of shell companies, widening of the tax base and increasing digital payments. All of these could have been achieved without inflicting such a heavy toll of miseries on the nation, and particularly on poor households.

Updated On : 8th Sep, 2018


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