Post Date: Post Date – 12:30 AM, Wed – Nov 9th 22
Just six years ago, Prime Minister Narendra Modi took the nation by surprise by abruptly announcing the scrapping of monetary policy. It was packaged as a bold move to mine black money, reduce counterfeit money and curb terrorist funding. But it turned out to be India’s biggest economic disaster. On the merits of the move, the banknote ban could be India’s worst post-independence economic move. It’s not doing what it’s supposed to. On the contrary, it caused untold suffering to the people, destroyed several businesses, destroyed the informal sector and put millions out of work. Ironically, cash is king again. Total currency in circulation is currently at its highest level of 14% of GDP, compared to 12% in 2010. While currency levels dropped significantly immediately after demonetization, they quickly rebounded to all-time highs. At 14% of GDP, India’s cash use is the highest of any major economy, compared with 3% in developed countries and 5-7% in developing countries such as Bangladesh and Indonesia. If the government thinks that banning high-value currencies overnight will hinder the use of cash, that has been proven to be completely wrong. Currency in public circulation rose to Rs 3,088 crore as of October 21, according to the latest money supply data from the Reserve Bank of India. Central bank data showed that the currency in circulation on November 4, 2016 was Rs 1.77 lakh.
Claims that demonetization will not adversely affect GDP growth are false. Nearly 2 billion rupees of economic output was lost in the year after monetization was abolished. At least for now, the NDA government must admit that the paper money ban was a failure and apologize to the nation. An ill-considered demonetization has thrown the economy into chaos and destroyed jobs. Rather than delivering the promised advantages, demonetization has had many dire consequences for the country’s economy. The MSME sector suffered the most as these SMEs rely heavily on cash and the sudden currency ban forced hundreds of thousands of MSMEs to close. However, the government has never acknowledged that the paper money ban has failed to achieve its key agenda of weakening the black money economy. Linking cash in circulation to corruption and dark money is a problematic premise, as tax experts generally agree that only 6-8% of the dark money accumulated by direct and indirect tax evaders is held in cash. Most of these are converted into assets, real estate, gold and foreign currency deposits abroad. With roughly 99.3% of demonetized paper money returning to banks, the outcome of one of the most disruptive economic moves becomes very questionable.
