In Charts: Why Demonetisation Was An Epic Failure
I can’t really forget that fateful November 8th evening in 2016. I was among the fortunate ones watching the news—well, my job demands that—when Prime Minister Narendra Modi appeared on my 20-inch TV and announced that currencies in the denominations of Rs 500 and Rs 1,000 would be invalid post midnight. I didn’t react; thought it was rubbish—the 21-year-old me hadn’t really seen anything like that.
I changed the channel. It was the same news everywhere! The same tickers. Breaking News!
I stormed out of my room, clutching the last two 500 rupee notes I had left. I went to a grocery store and bought two packets of milk. I made my way to another store. More snacks and biscuit packets were purchased. I even got back the exact change. The next morning, both the shopkeepers were smiling at me.
I had duped them, for sure—but I was duped as well.
A total of Rs 15.44 trillion, or rather, 86 per cent of the currency in circulation, was wiped out that day. But guess what, 99.3 per cent of the demonetised notes are back in circulation, the 2017 Reserve Bank of India (RBI) annual report said.
Modi claimed that demonetisation was necessary to break the back of all forms of terrorism and corruption by eliminating black money from the system.
Three years on, not only is black money (held in the form of cash) back in the bank—Rs 15.28 trillion in illegal notes—terrorism is as big a threat as it was before the note ban. Data from the South Asia Terrorism Portal says that there have been more than a thousand terrorist attacks in India in the last three years, including those in Gadchiroli, Amarnath, Sukma, Dantewada and Pulwama.
The currency in circulation crashed after demonetisation but the cash usage in the economy has not only sprung back up but has surpassed pre-demonetisation levels.
Soon, I was out of cash. I had money in my account but the ATMs were overcrowded. Digital wallets like PayTM gained prominence, but you needed cash to pay for your auto. I would wake up and see people all queued up; straight from office, waiting up until midnight, but they would still be there—in shorts, sweaters and sweatshirts.
But, the crazy thing is: they were all standing in a queue. This discipline; it was a bit surprising for me. I have seen my mates jostling out of their classrooms; people fighting to be the first one to get a ticket; to board a bus, a train and a metro; or even for a seat—heck, even I’ve done that.
But hey, it was as if we were all standing united in adversity.
And amidst the crowd and confusion, demonetisation attained new roles. Government spokespersons claimed that besides black money, the note ban was key to promoting digital payments and financial inclusion.
And though digital payments did spike immediately after the note ban, they’re back to where they started. What does this mean, you ask? Well, it was more of a crisis-reaction than a behavioural change.
According to the World Bank data, the overall usage of digital payments in India increased 10 percentage points between 2014 and 2017 to 29 per cent. Despite that, the average usage of digital payments in India remains more than 50 per cent less among the 10 largest emerging markets.
India did witness a sharp increase in point-of-sale (PoS terminals) and automated teller machines (ATMs) post-demonetisation, but that number is still the lowest as compared to the G-20 countries.
According to this research, an extensive ATM network reduces our tendency to draw out more cash, which in turn helps boost cashless payments.
In another defence, the government said that demonetisation would drag more Indians into the tax system. True, the total number of registered e-filers grew 73 per cent from 6.2 crore to 8.45 crore in 2017 and 2019 respectively.
But, in a first in the recent history of tax filings, the income tax e-filings in March, 2019 have dropped by more than 6.6 lakh. This is quite a disaster.
“Demonetisation led to a further decline in the already decelerating credit growth of the MSME sector, while GST implementation does not seem to have had a significant impact on overall credit to MSMEs," a research paper by economists at RBI wrote.
In India, the Micro, small and medium enterprises (MSMEs) sector constitutes a vast network of over 63 million units and employs around 111 million people. The share of MSMEs in overall GDP is around 30 per cent. It accounts for about 45 per cent of manufacturing output and around 40 per cent of total exports of the country.
Due to the size and nature of business, this sector is relatively more susceptible to various shocks to the economy. Demonetisation was one.
“The deceleration in credit growth during 2014-16 was partly due to overall slowdown in economic activity, rising non-performing assets (NPAs) and reclassification of food and agro-processing units from MSME category to agriculture sector,” the paper noted.
“Credit growth fell significantly and turned negative during November 2016-February 2017. Therefore, it seems that demonetisation accentuated the slowdown in credit growth, particularly to industrial sector.”