A decision of the Reserve Bank of India (RBI) has once again reminded people of demonetisation. The RBI will withdraw the Rs. 2,000 note from circulation.
This note came into circulation in November 2016. The Centre had then banned the Rs. 500 and Rs. 1,000 currency notes. In its place, a new note of Rs. 500 and Rs. 2,000 was issued. The RBI has now stopped printing the Rs. 2,000 notes from year 2019.
At present, the RBI has asked people to exchange the Rs. 2,000 notes in banks or deposit them in their account till September 30, 2023. Also, banks will not issue any new notes of Rs. 2,000 denomination to the account holders.
According to the data available, from Rs 6.73 lakh crore notes of Rs. 2,000 notes in circulation (37.3 per cent of the notes in circulation) as on March 31, 2018, they now account for only 10.8 per cent of the notes in circulation i.e. Rs 3.62 lakh crore as on March 31, 2023.
Incidentally, demonetisation had happened twice before 2016 in India.
In 1946, the British government had carried out demonetisation. Then, in 1978, currency notes of Rs. 1,000, Rs. 5,000 and Rs. 10,000 were demonetised.
Prime Minister Narendra Modi had announced demonetisation on November 8, 2016. After this, notes of Rs. 500 and Rs. 1,000 were banned in the entire country, which was a total of 86 per cent of the entire currency circulation at that time.
With the decision of demonetisation, promises were made to get the country rid of black money, make the economy cashless, and indirectly curb extremism and terrorism. Some even saw this as a surgical strike against corruption.
Due to the decision of demonetisation, a large number of people started queuing up outside banks to get their notes exchanged. There was chaos all over the country, yet the entire country stood united.
Incidentally, this demonetisation has not made any sense in the case of black money, in spite of reports of note bags being burnt and thrown into rivers. Also, a report published by the RBI in August 2018 showed that 99.30 per cent of the old notes have been deposited back into banks, which means that the hope expressed by the government that people with large amounts of black money will get a shock, did not happen, and almost all the money returned to the banks.
The influential people, who had huge amount of notes of Rs. 500 and Rs. 1,000, did not face any problem in getting their notes exchanged from the banks. The lives of the poor and rural people who depend on cash were the most affected.
Between November 8, 2016 and December 30, 2016, Pradhan Mantri Jan Dhan Yojana (PMJDY) accounts received a sudden cash infusion of about Rs 42,000 crore.
In fact, most of the share in this was from influential people. Some influential people also converted black money into white through gold shops.
In fact, most of the black money is not in cash, but it is in gold and real estate and demonetisation has not affected them. Funds parked by Indian individuals and firms in Swiss banks have reached a 14-year high of 3.83 billion Swiss francs (over Rs. 30,500 crore) in 2021, according to Swiss National Bank data.
The problem of counterfeit notes still persists. RBI has said that the number of fake notes has increased by 10.7 per cent. Of the total counterfeit notes, 6.9 per cent were detected in RBI, while 93.1 per cent were detected in other banks. Terrorism remains a major problem even today. Similar is the situation in the case of Naxalite activities.
When demonetisation was announced, people had a hope that the difference between rich and poor would reduce in the country, but it did not happen.
According to Oxfam International’s “Survival of the Richest” report, by 2022, the number of Indian billionaires is set to increase from 102 in 2020 to 166 from only 9 in 2000.
The richest 1 per cent in India now own more than 40 per cent of the country’s total wealth and just 5 per cent of Indians own more than 60 per cent of the nation’s wealth.
How successful has been the digital transaction? The answer to this question seems to be in favour of the government.
According to RBI data, in financial year 2022, around 71 billion digital payments will be recorded across India through the Unified Payments Interface (UPI).
This was a significant increase compared to the previous three years. The reason for the increase in cashless payment over time was due to demonetisation, better Internet system and the wide spread of smartphones and also because of the Covid-19 epidemic.
Donations are also being done through QR codes these days. This is nothing less than a revolution in terms of digital payments. A report by the Boston Consulting Group states that by the year 2026, two out of every three transactions in India will be digital.
But the truth is also that people’s dependence on cash has become more than ever before, and people’s trust in banks has decreased.
Cash still remains the king of the market. Before demonetisation, Rs 17.74 lakh crore of currency was in circulation on November 4, 2016, which has increased to Rs 32.42 lakh crore on December 23, 2022. This shows that even after six-and-a-half years of demonetisation, the country continues to have a lot of cash usage.
Actually, it is difficult to answer whether the decision of demonetisation was right or wrong.
However, the Constitutional Bench of the Supreme Court has given a big relief to the government on the decision of demonetisation.
It would have been better if the Rs. 2,000 note was not brought at all, so that the government and the public would have been saved from this whole process and its cost would have been saved.
The Rs. 500 notes should also be removed from circulation in a phased manner, and to control the problem of black money, property should be linked with Aadhaar, property tax should be increased, cash transactions above Rs 5,000 should be banned and Aadhaar should be made mandatory for transactions valued at more than Rs. 50,000. The more transparent the transactions are, the more the economy will shine.
The author is an associate professor at the Atal School of Management at Jawaharlal Nehru University, New Delhi
(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.