Failure of the Demonetization Process, Transformation of Black Money Into White

Demonetization refers to stripping a currency unit of its status as legal tender, happens whenever there’s a change of national currency. It is not a new concept in India, as it has already been done in the past but not on a large scale. Like for example in 1978, 10,000 rupee notes were demonetized. However, only very rich had these notes and the general population of the country remained unaffected by this change.

On Juy 12, 2017, eight months since the announcement of demonetization, RBI Governor Urijit Patel told the Parliamentary Standing Committee that he could not state how much money had actually come in since the RBI was still counting the money received by the banking system.

This speaks pretty poorly of Indian banking System as they failed to give even a rough estimation of this amount, considering that all exchanges were stopped as of 31st December 2016 (Indian residents) and 31st Mar’17 (NRIs).

You know what I think? The RBI Governor is lying.

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Yes, you read it right. RBI Governor Urijit Patel is lying. He knows exactly how much money has come back into the system but has failed to reveal it. Why? Let’s start at the time when demonetization was announced last year, the amount of money in circulation in terms of 500 and 1000 rupee notes were estimated to around 15.5 lakh crores. And the government was expecting around 13 lakh crores to come back into the system and the remaining 2.5 lakh crores were “black money” which could not be returned in the full glare of publicity.

It was thought that black money holders would throw away these worthless notes (some of which did happen). This was how the black money was supposed to “hit”. Additionally, since 2.5 lakh crores of promissory notes were never going to appear in the system, it meant RBI would be absolved of 2.5 lakh crores worth of debt to the general public. This extinguished debt was going to be a one-time bonanza that RBI could transfer to the government as a huge budget surplus that could then be used to fund so many new initiatives.

Here’s what I think happened. I believe that the expected shortfall in the currency returns did not materialize. On contrary, I believe more money than expected 15.5 lakh crores has come back into the system. Which implies that far from demonetization having struck a blow against the black money holders, the system has been cheated and that too in more than one way.

Demonetization instead of eradicating Black money from the country helped these counterfeiters effectively turning it into “white”. Since virtually all the deposits made have been under 2.5 lakhs per bank account. A lot of private deals between the black money holders and ordinary account holders must have been struck to enable this money laundering and the government is no stranger to this. The original owners will eventually get back all their money (minus the commission to the account holders, obviously). Thus the whitewashed money will return back to the black economy, and the taxman will remain empty-handed.

Counterfeit currency in 500 and 1000 rupee denomination has been successfully converted into the genuine currency of smaller and larger denominations (100 and 2000 rupee notes). That means the money that returned is more than what RBI had put into circulation, it only means a large number of counterfeit notes have also been submitted and exchanged for genuine notes. This has unintentionally devalued our currency.Which means poor people have suffered for nothing. It was remarked during the months of November and December 2016 that the Indian people were demonstrating exemplary patience. Poor and lower middle- class people went through a lot of hardships, like standing for hours in a bank or ATM queues and managing their lives with the chronic shortage of money. Yet the thought that it was all for good cause, that the black money holders will get what they deserve, kept them going. But now, it turns out black money holders have managed to have the last laugh, and that common man has suffered for nothing, won’t the voting public be outraged?

Contradictory for a move that caused such a widespread suffering, demonetization boosted PM Modi’s popularity. He was seen to have struck a blow for the common man against corruption, and people were willing to suffer to see his efforts succeed. PM Modi seems like a clever and decisive leader who outwitted the enemies of the nation and placed India on a path of growth and prosperity. But now everything has been turned upside down. He no longer looks clever and the crooks have taken him for a ride.

In India most consumers and households prefer transacting in cash for the purchase of durables as well as essentials. Also over 50% of the population does not know how to use card payments or other forms of digital payments.

Finally I would like to end with what Dr. Manmohan Singh said regarding this demonetization process being a monumental mismanagement where there are no two options in a country as a whole. Although some people believe that measure will do harm or cause distress only in the short run but will be in the interests of the country in the long run. But lets not forget what John M. Keynes once said, “In the long run all of us are dead.”