Demonetisation: The Move And Its Aftermath

Life in the Times of Demonetisation


8 November, 2016 will go down in history as the date that changed India.  On this day, Prime Minister Narendra Modi set India on an unchartered course, which even he was unsure of, when he made the dramatic announcement of withdrawing of Rs 500 and Rs 1000 note as legal tender and replace it with new Rs 500 and Rs 2000 notes. India is still reeling under the impact of that announcement and will continue to do so for some time to come.

Whether the bold move by the Indian PM will benefit the economy and nation in the middle-to-long term or whether it will result in an economic chaos that will pull India back several years, is still being debated by economists and analysts who remain divided on the subject.

But what followed the announcement and its aftermath is documented here.

Panic and Anxiety

The nation expected the PM to make yet another announcement of a social benefit scheme and no one could have been prepared for what was to come. The announcement made that late evening caused widespread consternation and panic across the country, with the common man trying to absorb and understand the possible consequences and impact on their lives. The business and trading community that dealt in cash went into a complete frenzy trying to contact any source that would exchange their old currency with the new one.

Black money hoarders who had cash stacked in their homes frantically began calling their chartered accountants late at night desperately seeking a solution. Such was the panic that by next day old cash was being traded for new ones at a discount of 15-50%. Chartered accountants were quick on the take and began advising clients to either use cash to buy gold in any form available or deposit their old currency into accounts of workers and employees.

In a matter of days, bankers realised that they were in a unique position to convert black money into white and some, in collusion with CAs and clients, began converting large sums of money through genuine and fictitious accounts, for a commission.

The government soon caught on and ordered the Enforcement Directorate and Income Tax officials to conduct raids and take strict action against those violating the law. What followed further caused panic among the banking community across the nation.

News began trickling in on old currency being destroyed or simply thrown into garbage lots. Meanwhile, the salaried class began to rush to their banks in the hope of exchanging their old currency with new ones. They were in for a rude shock.

The Long Queues

The ordeal had begun for the common man. Massive serpentine queues began forming outside banks and ATMs, with people waiting for hours for their turn. With most ATMs non-functional on account of lack of recalibration to the new currency, people had to return home without any money after standing almost the entire day in queues. The story was repeated across the country.

It has taken over a month for ATMs to be recalibrated and money circulation has since improved and now one sees shorter queues outside ATMs and banks. But the situation remains far from normal.

Cash Shortage

It is obvious that the entire exercise of demonetisation was rushed into with very little planning on how it was to be executed and what its immediate and long term consequences could possibly be. The task is monumental before the government and the situation is not likely to improve to pre-demonetisation days until December of 2017. Here’s why.

According to Minister of State for Finance, there were 17.17 billion pieces of Rs 500 and 6.86 billion pieces of Rs 1000 in circulation till 8 November. This translated to around 87% of the total currency in circulation. So when the government withdrew 87% of the currency overnight, it should have replaced the same immediately in order to ensure no real impact to the economy. But this hasn’t been the case.

The Ministry of Finance operates two currency printing presses, one in Nashik (Maharashtra) and the other in Dewas (Madhya Pradesh). The Reserve Bank of India operates two presses, one in Salboni (West Bengal) and the other in Mysuru (Karnataka). The two presses owned by MoF are relatively older and therefore have limited capacity to print, while the two presses owned by RBI are more recent and have a higher capacity.

Although the government hasn’t officially made any statement on this, reports suggest that Rs 2000 note began to be printed only in September, two months before the announcement, while printing of Rs 500 notes started only around 20 Nov, after the initial batch was rejected on quality grounds. The resulting gap in supply caused severe hardship to people and resulted in the long queues that one witnessed since 8 November. Based on the printing capacities in all four presses, it is estimated that the new currency notes will replace the earlier ones not before December 2017.

Policy on the move

What reflected poorly on the government was the abruptness of the announcement and the shortage of cash that followed. The fact that the RBI was silent on the issue for almost a month added to people’s confusion on the government’s plan or lack of it. The fact that RBI has been coming out with a slew of circulars in the last 50 days clearly point to the lack of foresight on the magnitude. The impact of demonetisation has ultimately reflected on the Modi government, which until Nov 8, was continuing to ride high on two and a half years of positive government initiatives and an economy that was on an upward trajectory.

Opposition gets a boost

The disunited opposition, led by a beleaguered Congress, which so far seemed clueless on stopping the Modi juggernaut, now found an opening that it could cash on – people’s anger and mounting job losses. Sensing an opportunity, the Congress, led by Rahul Gandhi, has ensured that the winter session of Parliament was a washout and took the government to task at the street level. The government, on its part, has not been able to successfully counter the opposition charge on the consequences of demonetisation, given people’s growing anger and frustration at job losses and lack of money in circulation.

Economy impacted

There is no doubt that the economy has been negatively impacted as all economic indicators seem to say so. Industries which operate mostly on cash have taken the maximum brunt with most shutting shop or facing closure. These sectors pay cash to workers in the supply chain, and so with cash being unavailable, most of the migrant labour have returned to their villages. The same is true of the agriculture sector.

Organised sectors are still holding on but stare at losses for at least the next two or three quarters. The automobile and auto parts industry are a case in point. With companies reporting cutting back on production and deliveries, the impact can be seen down the supply chain.

Growing frustration and political fallout

The Modi government has taken a high risk gamble on demonetisation and it is still not clear how the government and ruling party will benefit.  PM Modi was hoping for a windfall by recapitalising the banks, cleaning out the counterfeit money in circulation and bringing the fight against black money back in the spotlight, in an overall attempt to regain lost initiative before the Uttar Pradesh, Punjab, Goa and Manipur polls.

However, with the currency situation not easing off anytime soon, job losses continuing to mount at the critical level especially in the labour and farming community, the rising anger within the trading community and with new job creation set to slow down, the Modi government has an uphill task before it.

Whether the move on demonetisation has been politically smart or one of shooting itself in the foot, will be known once the results of the four states that go to polls in 2017 come in.

Read more on Demonetization :

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After Note Ban Be Ready for ‘Benami’ Axe

What will the RBI do with the old currency notes?

Can India really become cashless?

How to Convert Black Money into White

How Will Rs 500, Rs 1000 Note Ban Impact Real Estate?

What’s Unique About The New Rs 500, Rs 2000 Notes?

Tourist Season Faces Brunt Of Demonetisation