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Demonetization - An analysis
November 8, 2018 marked the end of two years of demonetization. While the government reiterated the success of demonetization, the opposition led by the Congress vehemently criticized the initiative and called it 'Scam of the Century'.

There will always be two schools of thought regarding almost everything. So demonetization has its admirers as well as critics. In this article I will try to give a neutral perspective.

Why demonetization was required?

During Atal Bihar-led NDA rule from 1999-2004, the GDP was 5.4%, but 60 million jobs were created. During the UPA rule from 2004-2014, the GDP was 9.8%, but only 2.7 million jobs were created; less jobs despite a higher GDP! It is surprising that this obvious anomaly was never questioned by any economist.

While stocks climbed to 32%, gold to 38%, real estate to 21%, inflation to 4.5%, CAD to over $20 billion in 1999-2004; the stocks rose 338%, gold 332%, and land 300 to 2100%, inflation 6.8%, CAD $360 billion between 2004-2014.

The number of high value currency notes printed in 2004 was 1.5 million (around 34% of total money). But it skyrocketed to 15 million (around 87% of total money) by 2015. RBI printed money in Rs 500 and Rs 1000 note denominations. One thirds of Rs 500 notes and two thirds of Rs 1000 notes never returned to the banking system which means around Rs 5 to 6 lakh crore cash was roaming in the market increasing the asset prices exponentially. Any cash transaction is anonymous and bypasses the banking system. Such parallel cash dominated economy is a perfect recipe for bankruptcy of the nation. We hear stories about how Pakistan PM Imran Khan is struggling to get a bailout package to save Pakistan. Without demonetization, India would have suffered the same fate.

Well known economist Mr S Gurumurthy said, "Demonetization was a fundamental corrective action without which the Indian economy would have collapsed by now. The growth driven by asset price rise led consumption fueled by withdrawal of capital gains tax was a mirage. Continuation of it would have been disastrous. Demonetization was an inevitable purgative."

Implementation of demonetization

Some critics say it was poorly planned and implemented. In 1978, late Morarji Desai declared demonetization of Rs 1000, Rs 5000 and Rs 10000 notes. That was not much of a success as the declaration of demonetization did not catch anyone off guard. If you declare demonetization and give time to people, then it is analogous to the police alerting thieves before a raid.

Having said that, the government could have done better during the early stages of demonetization! The whole of India stood in queues on almost a daily basis. It was particularly painful to watch helplessness of people with most ATMs running empty due to want of cash. There were also unconfirmed reports of deaths of people while standing in queues. This was expected as suddenly people habituated with cash dealings were compelled to switch over to cashless transactions. Facilities for digital transactions weren't aligned with the sharp rise in demand therefore people suffered a lot during demonetization for close to at least two months.

Venezuela, a country with a population of 3.2 crore witnessed demonetization which became immediate failure within a few days forcing the government to withdraw it. But in India, a country of 1.3 billion people, demonetization was thoroughly implemented barring little hue and cry from here and there. The people largely cooperated with the government and that is why it succeeded despite the opposition parties trying hard to create a riot like situation in the country.

Only the people can tell whether the pain they took resulted in any gain for them. I think yes, there have been gains and more are to follow.

Achievements of demonetization

  • 99.3% of demonetized currency came back to banking system. That does not mean demonetization was a failure as each note deposited had an address for scrutiny which helped in identification of suspected 17.42 lakh bank account holders who are now facing punitive action. Confiscation of currency was not an objective of demonetization. Getting it into the formal economy and making the holders pay tax was the broader objective.
  • The lending capacity of banks increased and loans are now given to many people to start businesses. Formal economy was restored.
  • Income Tax filers increased from 3.8 crore in May 2014 to 6.86 crore in 2018. The new filers added this year are 86.35 lakh. Direct tax collections were higher in FY 2018-19 (till Oct' 18) compared to the previous year by 20.2%. Corporate tax collections rose by 19.5%.
  • Digital transaction was encouraged. The Unified Payment Interface (UPI) was launched in 2016.Since then, it has grown from Rs 0.5 billion in October 2016 to Rs 598 billion in September 2018. The Bharat Interface for Money (BHIM) app developed by NPCI for quick payment transactions using UPI is currently used by 1.25 crore people. The RUPAY Card is used both at the Point of Sales (PoS) and for e-commerce. Its transactions have increased from Rs 8 billion before demonetization to Rs 57.3 billion in September 2018 for PoS and from Rs 3 billion to Rs 27 billion in e-commerce. Visa and Master card are feeling the heat as they lost market share to RUPAY card which is now the market leader.
  • GST, which is giving us rich dividends in indirect tax collections, required formalization of the economy and would not have been possible without demonetization. In the last month the GST collection was more than Rs one lakh crore.
  • Fake notes were eliminated from the system.
  • Funding to terrorism and Naxalism took a hit.


We elect governments to take decisions that help the citizens and the nation at large. Indian economy was in doldrums in May 2014. Demonetization and GST are the two most important reforms for the Indian economy. When the patient is serious, sometimes operations are to be done to make the patient healthy again. The same was with India's economic condition and operations were desperately required. All thanks to PM Modi for showing the guts to take such path braking decisions.

Why some people, economists, opposition parties and others are calling demonetization as a monumental failure, legalized plunder, scam of the century, Tughlak decision blah, blah, blah?

Well, the opposition parties are supposed to oppose everything done by the ruling government. They might have even lost substantial ill-gotten wealth as well in demonetization. The economists are taking sides as per their loyalties. Imagine a computer being formatted. It takes a couple of hours or a little more. The viruses show up during the reformatting. Similarly, when the country is being reformatted, the problem creators will automatically show themselves up. As a citizen, we need to understand who is good for us and the country and take decisions accordingly.

I personally think that demonetization was a great step taken by the Modi government.

Editorial NOTE: This article is categorized under Opinion Section. The views expressed in this article are solely those of the author and do not necessarily represent the views of In case you have a opposing view, please click here to share the same in the comments section.
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