Was Demonetization Worth The Trouble?

Just as we acknowledged the fact we were comfortable with our economy, India witnessed the most dramatic event involving money on November of 2016.

On 8^th November 2016, 8:15 pm, Prime Minister Narendra Modi announces the demonetization of the 500 and 1000 rupee notes, the two biggest denomination notes.

These notes accounted for 86% of the country’s cash supply. The goal was to fight tax evasion, eliminate black money and to promote a cashless economy.

Successful transformation of these notes into new notes was no easy feat. But India was not the first country in the history of the world to do this.

In 2015, the Zimbabwean government demonetized the Zimbabwean dollar and replaced the US dollar as a way to combat the country’s hyperinflation that was recorded at 231,000,000%.

The reason for demonetization in India cannot be compared with Zimbabwe as the change in currency was forced by the government as a way to eliminate unaccounted (black) money.

By making the larger denomination notes worthless, individuals with huge sums of black money were forced to convert the money at a bank which is by law required to acquire tax information. If the individual could not provide proof of making any tax payments, a tax penalty of 200% of the tax owned was imposed.

For the current government to achieve this, the entire operation had to be performed in secrecy to maintain effective measures.

PM Narendra Modi handpicked a trusted bureaucrat (Hasmukh Adhia, principal secretary to Modi from 2003-2006 when he was the CM of Gujarat) and a group of young researchers and worked in two rooms at Modi’s New Delhi residence. They were sworn to utmost secrecy aimed to outflank those who might profit from prior knowledge.

This announcement triggered a mad scramble to unload the expiring banknotes in gas stations and jewelry shops. Long queues were seen in, out, and around banks, ATM’s and almost anywhere where people might exchange the soon-to-be denominated notes.

But, even upon getting to the front of the line, people were often met with strict restrictions as not enough new currency was printed prior to the announcement. Every ATM had to be modified to fit in the new notes, which made the process even worse.

India’s previously booming economy has come to a halt. The impact of the so-called “Pro-Poor” policy has not been felt equally by all. India’s wealthy, who are less likely to hold cash are relatively unaffected, whereas, the poor and the middle class, who rely on cash for their daily activities are the victims of this policy.

The fishing industry, farmers, daily wage workers, traders are the most vulnerable to this surprise policy. Inadequate support from private organizations and hospitals has increased the intensity of impact on the poor and the middle class people.

Inspite of all these hurdles and difficulties, Modi has received massive support from the ordinary Indians and are willing to heed Modi’s call to be patient for 50 days, even though it could be much longer before the normal money supply is restored.

The Riches with large quantities of black money seem to have found creative ways to launder it, rather than destroying it to avoid attracting the taxman’s attention, as the government expected.

On top of all this, the government has not done anything to control the source of the black money. It would not be long before fake purchase orders or bills, reporting of non-existent transactions generate a new store of black money.

Even though the decision could have been better conceived, the sudden announcement has been plotted as the boldest reform by the Prime Minister since coming to power in 2014 and generates a considerable scare amongst the riches and the black money holders and marks a strong and a bold step against corruption.