Vol. 9, Issue : 9
September 2017
The Fallacy of Demonetisation
At the time of demonetisation, Modi claimed that
it was aimed to wipe out black money and counterfeit
currency, stop terrorist financing and end corruption.
Later his government told the Supreme Court that
the measure was taken to promote cashless
transactions that regularises the informal economy
and induce tax compliance. This was also played
down later to less-cash economy. His lieutenants in
the cabinet called it as a master stroke that brings
many benefits to the people and economy and from
time to time parroted that the indictors of a good
economy proved the correctness of the measure.
Eight months after demonetisation, the RBI
released its Annual Report 2016-17 which showed
that 98.96 per cent of the RS. 500 and Rs.1000
denomination notes that were withdrawn from
circulation returned to the banking system. Only the
notes valued Rs.16,000 crore did not return. This
means that the estimation of four to five lakh crore
rupees of black money existed in the economy could
be wrong. Or that the demonetisation has not
resulted in wiping out black money and it flowed
smoothly in to official channels. The fact of the matter
is that black money does not exist in the form of
cash; it constantly transforms into other assets like
gold, real estate etc. Most of the black money that
remained at that time as cash had found its way to
banks through ingenious methods adopted by its
holders.
Same is the case with counterfeit currency. It
was estimated that up to Rs.400 crore was in
circulation. The value of detected fake notes went
up to Rs.43.5 crore in 2016-17 compared to Rs.29.6
crore the previous year. Here also demonetisation
failed to meet the objective.
As the detected fake notes are too small to affect
terrorist financing and the terrorists does not rely
on money alone for their activities, the
demonetisation proved to be a simplistic solution to
a complex political problem.
The digital transactions that grew to the value
of Rs.7.4 lakh crore after demonetisation from Rs.4.3
lakh crore the previous year due to non availability
of cash has come back to the previous level.
Since the demonetisation, Modi repeatedly
appealed to the people to bear the ‘temporary
hardship’ that would be overcome in 50 days. He
promised that there would be long term benefits to
the people as the black money confiscated will be
used to fund the welfare schemes. The people found
now as it yet another empty promise that makes the
people to chase mirages.
Despite these undisputable facts some of the
economists came out with incredible arguments.
“The whole story is that to the extent the black money
has come back to the banking sector and has become
white money, the economy itself has become white.
Now, all these people who have black money have
that in bank and they will get interest and they will
have to pay income tax on interest. In future if they
have to pay some money they will not give cash,
they will give cheque” (Business standard 4-9-
2017). And so black money will not generate again.
To cap all this mindless arguments, Arun Jaitly
unabashedly claimed that demonetisation along with
GST “changed the structural and ethical foundations
Organ of the Central Committee of CPI(ML)