The Demonetization Policy of Narendra Modi and Its Impact on the Growth of the Economy of India

Categories: Black Money

In the spring season of 2014, the citizens of India elected what many Indian citizens consider to be an aggressive, determined leader, Narendra Modi. After ten years of leadership from the INC (Indian National Congress party, Indians grew tired of the corrupt and scandalous government that Congress had given them. This outrage from India’s public resulted in the results of the 2014 Indian general election, where the BJP (Bharatiya Janata Party) gained over 150 seats, and the INC lost over 150 seats, and Narendra Modi became Prime Minister.

Once Narendra Modi came into office, he implemented conservative economic policies such as a dramatic decrease in social programs and a reduction in labor laws in India. Although arguably Modi’s biggest economic policy in India was his demonetization of the 500 and £1000 notes across all of India, which became known as the “2016 Indian banknote demonetization”. This policy had an enormous effect through throughout India and had many impacts being both positive and negative; the policy, for the most part, fixed India’s “black money” problem, reduced the power of radical groups in India, but also, on the other hand, made for a large inconvenience to the Indian public, while also leading to a slowdown in India’s economic growth.

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The primary reason for the demonetization policy was the large amount of “black money” in circulation throughout India, severely impacting India’s economy in a negative manner. The term “black money”, according to Oxford Dictionary, refers to “income illegally obtained or not declared for tax purposes”. This illegal money not only hurts the Indian economy because of the lack of taxes paid to the government, but counterfeit money is also being created in countries such as Pakistan, where fake money is being used to fund terrorists.

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This money is being used to start attacks against India, as Sharmad Mahajan in the article “India’s Fight Against Fake Currency” by The Diplomat presents, “The printing and circulation of (fake money) provides dual benefits for terrorist organizations targeting India: the circulation…threatens India’s economy while the profit that is earned from doing so is used to fund covert activities targeting India.” Serious and threatening cases such as these could potentially hurt India severely through terrorist attacks. By implementing the demonetization policy very quickly and unexpectedly, Modi hoped to get rid of the majority of black money in India and also get rid of the counterfeit money used to fund terrorists, and catch many drug dealers or other corrupt figures in India off guard. This way, a lot of the black money in circulation throughout India would be either slowed or halted completely, and the policy would also have corrupt persons turn themselves in, or be caught by the banks in India for having too much money without legitimate reason or cause.

The policy supposedly has worked exactly how Modi has wanted it to work, as the article “One Month In, What’s The Impact Of India’s Demonetization Fiasco?” by Wade Shepard in Forbes magazine states, “…the cash-centric black market for the most part ceased to function with the nullification of the bulk of its currency… in the immediate term all sorts of illegal activities, like terrorist financing, etc… have been completely hit…”. The statement provided by Shepard assures that the demonetization policy has done what it’s key goal was, to get rid of black money and counterfeit money. This would be considered a major advantage of the demonetization policy. Although this was the prime goal of the policy, it was certainly not the only effect that came out of it. Radical groups in India such as the the far left party of India, the Communist Party of India, have been deeply affected by the currency demonetization in a very undesirable way, specifically for the members of the party. Members of Communist parties in India are referred to as Naxals, and these Naxals get their money through politicians, political parties, and businessmen. Using this money, Naxals illegally buy guns, ammunition, bombs, and food for themselves, Naxals later use these guns and bombs to cause terror throughout specific regions of India.

According to Postcard News, “… The CPI (Communist Party of India)-Maoists one unit collect over 150 crores annually for their illegal activities.” All or most of this money is rendered useless because of the demonetization policy, so the far left extremist group of Naxals will no longer be able to commit terror against the rest of India. In fact, according to The Indian Xpress, “There has been no violence reported from Jammu Kashmir in the past 5 days. This is the first time ever in decades that Jammu Kashmir has remained peaceful for 5 consecutive days.” This is considered very significant because a week after the demonetization policy was enacted, there was no attack on Jammu Kashmir, one of the main sites for terrorist attacks by the CPI-M. Due to the demonetization policy, terrorist groups (the CPI-M is considered a terrorist group by the Indian government) such as the CPI-M are unable to get money funneled to them in illegal ways to promote terror across India, and this is considered a major advantage of the demonetization policy.

Though there are quite a few economic advantages to the demonetization policy, it still had its own issues. Due to the fact that the demonetization policy was very all-of-the-sudden, Indians had to come rushing to banks to deposit their notes, and with the extremely large population of India, this did not bode well for many people. People were stuck in lines for a very long time, and this especially impacted the elderly of India, and make it a huge inconvenience in India. As shown in Fig. 1, there were many people waiting in line for hours at banks to simply replace money with the same amount of money. Another issue is the raw amount of cash that is in circulation in India, as according to the CNBC article, “India set for slowest growth period as demonetization dents economy” by Saheli Roy Choudhury, “More than 50 days have passed since India introduced its demonetization program in November, impacting 86 percent of India’s currency in less commonly used in India because of the lack of United States type modernization. Economic growth in India has also been slowed after the demonetization policy, as the same CNBC article states “India’s fiscal 2017 growth rate to 6.6 percent on-year from 7.3 percent previously. For fiscal 2018, which ends March 2019, the bank expects growth to be 7.2 percent on-year, down from an earlier projection of 7.7 percent.” This slow down of growth is most likely heavily linked to the removed of the banknotes, which halted Indian consumer’s spending and purchasing for a limited time.

The inconvenience cost to Indian citizens and the slow down of the economic growth are very big disadvantages to the demonetization policy in India, but they may be only temporary. The daring move by Narendra Modi to declare 86% of currency in India defunct has made for quite some changes to the Indian economic sphere. Directly because of the move by the Prime Minister, illegal, black money and counterfeit money has been taken out of circulation almost entirely, and radical groups such as the Communist Party of India have been stunned from committing terrorist attacks against India. From another point of view, people across all of India had been panicked by this sudden change, and have to adjust to it. The economic growth of India has also been reduced by quite a margin. The policy has had dramatic effects on nearly everyone in India, some way or another.

Cite this page

The Demonetization Policy of Narendra Modi and Its Impact on the Growth of the Economy of India. (2022, Feb 27). Retrieved from

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