CONCLUSION

India was transfixed and transformed a year ago on 8 November, when Prime Minister Narendra Modi, in his
resolute war against corruption and black money, demonetized Rs500 and Rs1,000 currency notes. The
political verdict came swiftly with stunning wins for the Bharatiya Janata Party (BJP) in Uttar Pradesh and
Uttarakhand, and rapid government formation in Manipur and Goa. The prime minister’s popularity reached
new heights and his approval ratings soared to levels rarely seen in democracies. The people of India
recognized that a surgical strike was required to curtail illicit activities and blessed demonetisation. Thus, in
political terms, demonetisation has already proven to be a resounding success.

On the other hand, in economic terms, a heated debate is under way whether demonetisation has been a
success or not. Several reputed economists have pronounced their judgements on demonetisation.

For instance, Dr Raghuram Rajan has mentioned that he believed that while there might be long-term benefits,
the short-term economic costs of demonetisation would outweigh them and that there were alternatives
available to achieve the main goals. He has chosen not to elaborate what he thought the long-term benefits
might be nor has he quantified the short-term costs.

Dr Manmohan Singh has estimated the cost of demonetisation to be 2% of gross domestic product. These
quick assessments appear specious. Zhou Enlai, when asked in 1972 about what he thought the impact of the
French Revolution of 1789 was, is said to have commented that it was too early to tell. When revolutionary
changes take place, it takes years, decades, or even centuries before the impact of such transformations can
be studied and commented upon.

Note that we lack scientific data and thorough analytical studies on the economic impact of demonetisation.
For any massively complex system, judging the impact of a large disruption requires careful understanding of
influence channels, distilling its impact on multifarious variables and finally, measuring its bearing, if any, on a
variety of outputs. An economy as varied as India’s is highly complex with multiple inputs, not-completely-
understood dynamics, many agents and actors with different motivations, and finally, outputs which are not
measurable with accuracy or certainty. It will take many years to filter out the economic impact attributable to
demonetisation and, indeed, this bold move and its implications will, quite probably, be the subject of
hundreds of dissertations. Consequently, any snap judgements will be coloured largely by ideology and
opinion.

Some data is beginning to emerge on how the economic trajectory actually played out as opposed to estimates
of how the various models predicted that they would play out.

Since demonetisation, the government has embarked on another ambitious bipartisan reform of consolidating
various levies and taxes in different states into one comprehensive goods and services tax (GST): such a large
reform intervention also creates its own changes in the economy.

To appreciate the changes that demonetisation brought about, we need to carefully choose and measure the
relevant short-term high-frequency indicators and a few emerging long-term indicators which point to the
direction that the economy has since taken.

High-frequency and quantitative indicators like (1) cash-to-GDP ratio, (2) volume of digital payments, (3)
number of new registered taxpayers, and (4) estimate of “unaccounted for” money and the number of tax
notices sent indicate that demonetisation has generated material changes. The cash-to-GDP ratio is now down
to 9.7%, from 11.3% pre-8 November last year. This cash is now in the banking system which has helped swell
the current accounts and savings accounts balances of banks: this will allow them to lend and invest more, and
at lower rates. Digital payments, at Rs50,000 crore in the month of October 2017, are up 41% year-on-year.
The finance minister has stated that 9.1 million taxpayers have been added to the tax net as a result of actions
taken by the income tax department during fiscal year 2017. Further, the ministry of finance has indicated that
between Rs3 trillion and Rs4.2 trillion is “unexplained” during the cash deposit rush post-demonetisation and
hence has sent out 1.8 million notices to assesses: apart from the one-time benefit to revenue of such
“declarations”, these moves could bring significant stock and flow of incomes into the tax net. This data shows
that demonetisation has had a positive impact on the formalization of the economy, improving the tax base
and hastening the use of digital payments. Consequently, it is quite plausible to argue that these effects, which
will clearly have an ongoing GDP impact, could easily swamp the impact of a one-time 2% decline in GDP.

Apart from these purely economic factors, there is another more profound behavioural change that has been
accomplished. A new normal has been established—Indians are paying their taxes and moving towards a less-
cash society. There is a pronounced trend towards tax compliance driven by the belief that the system is
working to reward honest taxpayers even as it makes life difficult for those who have been used to evading or
underpaying taxes. GST and the implementation of the benami transactions Act make it even more difficult for
anyone in the economic chain to opt out of the taxation system.

Massive reforms like demonetisation cannot be measured solely by using economic parameters but need to
take into account the structural shift that such reforms induce in society. Societal and long-term economic
changes are difficult to measure and require more reasoned, detailed, and patient analyses: this should
increase our resolve to do deeper research rather than jumping to hasty, ill-informed conclusions.
demonetisation has provided Indian citizens a unique opportunity to re-imagine not only their currency, but
also their own social mores, honesty, compliance with law, and their willingness to change and adapt to a
more transparent and New India. We should celebrate this New India.

The Economic Survey said that demonetization had led to Rs 2.8 lakh crores less cash and Rs
3.8 lakh crores less high denomination notes in the Indian economy

The Reserve Bank of India (RBI) has released numbers that show how most
of the currency notes that were cancelled were deposited in banks. Now that
we know that 99% of demonetised money has come back, the government’s
estimates of how much black money would be extinguished have been
proven wrong.

As the RBI’s latest annual report has confirmed, Rs 15.28 lakh crore or 99
per cent of the Rs 15.44 lakh crore worth of the notes withdrawn overnight
onNovember 8 was turned in. Thus, almost all demonetised notes have been
returned to the central bank, including the stock of black money held as cash.

2016 Indian banknote demonetisation

On 8 November 2016, the Government of India announced the

demonetisation of all Rs.500 and Rs.1,000 banknotesof the Mahatma Gandhi
Series. The government claimed that the action would curtail the shadow
economy and crack down on the use of illicit and counterfeit cash to fund
illegal activity and terrorism. The sudden nature of the announcement—and
the prolonged cash shortages in the weeks that followed—created significant
disruption throughout the economy, threatening economic output.

The Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 was

issued by the Government of India on 28 December 2016 ceasing the liability
of the government for the banned bank notes.
Demonetization technically is a liquidity shock; a sudden stop in terms of
currency availability. It created a situation where lack of currencies jams
consumption, investment, production, employment etc. The intensity of
demonetization effects clearly depends upon the duration of the liquidity
shocks. Following are the main impacts.

 Currency crunch in our economy

 Welfare loss for the currency using population.
 Consumption was adversely affected
 Consumption
 Production
 Employment
 Growth
 Tax revenue
 Loss of Growth momentum
 Increase in bank deposits and reduced interest rate
 Countering of black money
 Check on counterfeit currency

How money laundering took place?

The total reduction in black money was much smaller than what might have
been envisaged. To the extent that it was possible to exchange money legally,
individuals did so. After that it was done illegally.

Those who could not exchange money legally found money changers. When
the government announced that old notes could no longer be exchanged, but
only deposited, new ways of changing the stock of unaccounted cash
emerged. Individuals with bank accounts, including Jan Dhan accounts, and
companies showing cash accrual from sales came into business.

Large amounts could be laundered through this route as it did not involve
immediate cash payouts by banks, since cash shortages still persisted with the
RBI and banks scrambling to remonetise the economy.

Even when people have to pay tax on their hoarded cash, and a change fee
they preferred to do that rather than lose the whole amount.
 Data from Prowess, a database of companies in India, shows that in the
quarter of demonetisation, when purchasing power had fallen sharply, net
sales by companies rose significantly.

At the same time, the number of tax payers and tax collections rose. The tax
department is said to have found thousands of shell companies which were
possibly engaging in the activity of depositing money in their accounts
during the demonetisation period, claiming that it was cash from sales. This
provided a means for laundering money.

There is no doubt that those with holdings of unaccounted cash lost some
of their wealth in the process of laundering it. To some extent, taxes were
paid on it in the process of legitimising it. But in addition to that, illicit
wealth was redistributed from black money holders to money launderers.
Whether the money launderer was a company owner, a bank employee or a
Jan Dhan account holder, there was now a need breed of criminals with
wealth obtained from illegal means.

Objective seems unachieved:

The objective of reducing counterfeit currency seems unachieved.

In 2015, the National Investigation Agency established that at any point

only Rs. 400 crore of counterfeit currency is in circulation. That’s 0.028% of
total currency. Now, CNBC has calculated only 0.0007% of the returned Rs.
1,000 notes as being fake and only 0.002% of the Rs. 500 notes. In value
terms the total is just Rs. 41 crore. So either a lot of fake currency hasn’t
been detected or didn’t exist.

In terms of tackling terror funding, the Finance Ministry has said: “As a
result of demonetisation of specified bank notes, terrorist and Naxalite
financing stopped almost entirely.” But no proof has been provided.

Reduced dependence on cash: Both in number and value, digital transactions

increased sharply after November but also dipped sizeably thereafter. There
were 671.49 million transactions in November, rising to 957.50 million in
December before shrinking to 862.38 million in July. So, the use of cash
initially diminished but has been steadily increasing thereafter.

Criticism against demonetisation

Critics say, the Demonetisation as a means of tackling the black economy,
carried out on the incorrect premise that black money means cash. It was
thought that if cash was squeezed out, the black economy would be
eliminated. But cash is only one component of black wealth: about 1% of it.

Black money is a result of black income generation. This is produced by

various means which are not affected by the one-shot squeezing out of cash.

Any black cash squeezed out by demonetisation would then quickly get
regenerated.

So, there is little impact of demonetisation on the black economy, on either

wealth or incomes.

Negative economic consequence of demonetisation:

The disruption of unorganized supply chains that are dependent on cash

transactions; it is still not clear how smoothly they were being rebuilt as the
economy was remonetized.

No less has been the damage to institutional credibility. The RBI is yet to
convincingly demonstrate that the demonetisation decision was not forced on
it. At any rate, it was ill-prepared to deal with the aftermath, in terms of
making available adequate quantity of replacement notes in the right
denominations.

That remonetised notes are mostly of the illiquid Rs 2,000 denomination —

constituting over 50 per cent of the total value of currency in circulation even
as late as March 31 — didn’t help matters.

The economic costs— whether manifested in a crash in farm produce prices

or a wide swathe of cash-dependent informal enterprises going bust, not to
mention the sheer time wasted waiting in lines — are incalculable.

In the period immediately after demonetisation, there was expectation that it

would bring a windfall for the Centre. To the extent that the scrapped Rs 500
and Rs 1,000 denomination notes were not deposited or exchanged at banks
— especially by those who had hoarded their ill-gotten wealth significantly
in cash — the resultant reduction in the Reserve Bank of India’s (RBI)
currency liabilities would generate a “profit”, which it could then distribute
as dividend to the government. But this did not happen.
Potential advantages of demonetisation:

Attack on the scourge of black money, tackling corruption, counterfeit

currency, terror funding and reducing dependence on cash.

Changed narrative from Black money to cashless economy

The original intent of demonetisation was to address the issue of black

money. There is enough work that suggests that people with black money
hold a very small proportion of it in cash. Most of it is usually invested in
gold, or real estate, or in the stock market, or abroad, and the share of black
cash is 6% of the total black economy.

The primary pitch and narrative of the demonetisation drive by Prime

Minister seems to have taken a major shift to cashless economy from the
initial key highlights of war against black money, corruption and counterfeit
currency.

Now Government says that idle money has come into the system, the cash-
to-GDP ratio will decline; the tax base will expand. But none of these
required demonetisation and could have been implemented independently.

The government now also said that demonetisation is only one of the many
steps to tackle the black economy.

The government’s argument that cash coming back to the banks will enable it
to catch the generators of black income, and there will be formalisation of the
economy, may not hold.

Then the goalposts started shifting when it became apparent that the main
reason was not justified by what was happening. First it was cashless, then
less cash economy, then formalisation of the economy. The final step was in
saying this would give IT authorities the information to go after people who
had deposited black money.

Who mostly have borne the brunt?

Large deposits by businesses do not automatically become black. The

Income Tax department has to prove that the sums deposited resulted from
generation of black income. According to the Finance Minister, big data
analytics would track black money holders who have deposited cash in their
bank accounts.

The negative effect of demonetisation can be seen in terms of big losses to

the unorganised sector, farmers and traders.

The start-up world has seen a drop in investment activity

The brunt of this move actually has been borne by those who never had any
black money. The note shortage is slowly waning and the long-term
economic and social effects are becoming evident.

Critics overlook the significant gains of demonetisation which have begun to

accrue and will gather momentum
For India to achieve prosperity for all, three ingredients are essential: a
transparent, effective government, flourishing of competitive free markets,
and huge investment in the poor.

Corruption had made the government dysfunctional, crony capitalists

flourished at the expensive of honest entrepreneurs, and rampant tax evasion
that hindered state’s capacity to invest in uplifting the most vulnerable
citizens. Note ban was announced to overcome these issues to some extent.

Short-term costs inevitable

There were always going to be costs in the short run — people would be
short of currency, businesses would be disrupted, consumption would fall,
and GDP growth would take a hit.

S The government announced the Pradhan Mantri Garib Kalyan Yojana

where cash could be declared, deposited, and a hefty penalty paid. For those
determined to deposit their illicit wealth without disclosure, the cash has not
become white. It will be scrutinised by the tax authorities and penalties
levied.

The gains may accrue in the coming year once tax authorities have
scrutinized through accounts with suspiciously large deposits.

According to Finance Minister, between November 8 and December 31,

2016, deposits between Rs.2 lakh and Rs.80 lakh, and deposits of more than
₹80 lakh amount to some two-thirds of the value of the demonetised
currency. The holders of these suspicious accounts will now be in the tax net
for perpetuity.

However, not all of that money deposited is black. Perfectly white cash
holdings were common. To able to distinguish the black from the non-black
would be the responsibility of the IT authorities. They have to analyse the
deposits and correlate them with the tax payment records, which is relatively
easy to do.

Move to a less cash economy

The significant gain which has begun to accrue, and will gather momentum,
is the move to a cashless economy.
In the long run, a move away from the use of cash is the surest way of
curbing the black economy.

Less cash economy can happen with shift in payment patterns. There was
certainly evidence that the number of electronic transactions went up. But
after the money supply started coming back, those dropped. Whether Indians
have changed the way they make payments is questionable.

Other significant gains from demonetization

Nobel laureate Kailash Satyarthiand others working to fight human

trafficking said that the note ban had led to a huge fall in sex trafficking.

The Demonetisation has badly hit Maoist and Naxalites as well. The
surrender rate has reached its highest since the demonetisation is announced.
It is said that the money these organisations have collected over the years
have left with no value and it has caused them to reach to this decision.

Mumbai Police reported a setback to Hawala operations. Hawala dealers in

Kerala were also affected. The Jammu and Kashmir Police reported the effect
of demonetisation on hawala transactions of separatists.

Several e-commerce companies hailed the demonetisation decision as an

impetus to an increase in digital payments, hoping that it would lead to a
decline in COD returns which could cut down their costs.
The demand for point of sales (POS) or card swipe machines increased. E-
payment options like PayTM and Instamojo Payment Gateway, PayUMoney
also saw a rise.

The number of I-T returns filed for 2016-17 grew by 25 per cent and the
advance tax collections during that period rose 41.8% over the 1-year period,
as increased number of individuals filed their tax returns post demonetization

Salient lessons learnt

The government did not seek the advice of experts before going ahead. The
strategic decision to surprise holders of illegal wealth would anyway have
restricted the circle of those who could be informed, but it seems that the idea
didn’t come from experienced policy advisers.

Good policy design should take into account how people will respond to any
change in the rules of the game. In other words, incentives matter. Most
rational human beings will adjust their behaviour to further their self-interest.
Those who had illegal wealth held in cash obviously gamed the cash
exchange process. Good incentive-compatible policy design is thus as
important as good policy intent.

Political dynamics can be quite different from economic dynamics. That

voters have continued to back the Bharatiya Janata Party (BJP) despite the
pain imposed by demonetisation shows that the ruling party has gradually
redefined its typical voter from the traditional trading base that supported the
Bharatiya Jana Sangh to the aspirational middle class that has a lower
tolerance for corruption.

International evidence suggests that few countries address the problem of

black money by demonetising their currencies. If the problem is large-scale
crime, corruption, bribery, bureaucrat-politician nexus, rent seeking, tax
evasion etc. the answer lies in reforming the criminal justice system, law and
order, administrative reforms, bringing transparency in the functioning of the
state and rationalisation and simplification of the tax system.

In this context, the GST will be a far more effective mechanism to bring
down tax evasion in indirect taxes considering the greater incentive for
compliance that its design holds.
 This episode in India’s policy-making highlights an essential tenet of policy-
making — the need for a cost benefit analysis. For any objective that is to be
achieved, we need to examine various policy options and analyse their costs
and efficacy. For an economy on the path of reform, with many more reforms
still to come, long-term sustainable impact can be achieved only when we
strengthen the policy-making process as well.

Why Demonetisation alone is not responsible for slow GDP

growth?

Reading the signals from the growth numbers is proving a tricky affair —
especially as answers have to be shifted from multiple, intertwined
narratives: the political, the economic as well as the purely business. There
are multiple villains to blame, though, the most immediate being the damper
of demonetisation of November 2016 and the implementation of the goods
and services tax (GST) in July this year. Following may also be the reasons
for slow GDP growth.

There has been a sign of distrust in financial investments.

While GST pushed up gold buying, it pushed down manufacturing.

Manufacturing companies sent out their old stocks to market, holding back
on production. It brought down manufacturing sector growth from 5.3% in
January-March to 1.2% in April-June.

In the post-rabi-season quarter we expected strong agricultural growth but it

was pulled down by the animal husbandry sector. In fact, animal husbandry,
specifically buffalo meat exports, has been the leading contributor to growth
among all the areas that are clubbed under agriculture.

Uttar Pradesh, India’s largest meat processing state faced huge shutdowns
from end-March. Livestock contributes a little over 4% to GDP and roughly
a quarter of total agricultural GDP. Agri-sector growth dropped to 2.3% in
April-June quarter against 2.5% in the same quarter of 2016.

Robust government expenditure rose 27% in the April-June quarter, to 6.5

lakh crore. The not so good news: fiscal deficit touched 92% of its budget
estimates by July. At the same time, some of the government’s revenue-
generating plans have not being implemented. While disinvestment and
spectrum sales have yet to make significant headway.
 Lack of PPP projects is clearly our biggest problem. Implementing the
Kelkar Committee report and tackling the institutional bottlenecks that
constrain PPP in India are the need of the hour. There is an institutional
capacity issue. With an NPA overhang, corporates are wary and lack appetite
to take risks.

Savings from physical assets were being moved from gold and real estate to
financial assets. Gold (valuable) imports go up sharply. Household savings
moving away from physical assets, especially real estate may not be a good
thing for the economy. The second largest job creator after agriculture is real
estate and construction growth has already tapered.

Way forward

Government should focus on ensuring growth, job creation and investment.

The urgent need is to get the private sector to start investing. One way to
avoid winds of deflation is to kick-start private investments.

Reviving the investment cycle and tackling bad loans will be the key
challenges to be tackled on a priority basis in the current fiscal.

Government has launched a multipronged attack on corruption and black

money. Government discretion has been reduced particularly in the allocation
of natural resources.

There is a concerted attempt to improve ease of doing business, and

technology is being used to deliver public services without leakages.

It is far too early to write-off any of these efforts, and demonetisation. There
is a future beyond the present.

Conclusion
It is still quite possible that demonetisation will have positive consequences
over a longer period— the growth in the direct tax base, the switch in the
financial holdings of households from cash to bank deposits, and the
increased use of digital payments. The question to be asked is whether the
potential long-term benefits will be greater than the short-term costs that the
Indian economy had to bear.
 n the same day that Donald Trump was elected as the president of the United States, India also received an unexpected,
earth-shattering announcement: Demonetization.
At 10 pm on November 8, India's Prime Minister Narendra Modi announced that on the stroke of midnight all 500 and 1,000
rupee notes -- 86 per cent of the currency in circulation -- would cease to become legal tender.
Up to that point, upwards of 95 per cent of all transactions in India were conducted in cash and 90 per cent of vendors didn't
have the means to accept anything. On top of this, 85 per cent of workers were paid exclusively in cash and almost half of
the population didn't even have bank accounts.
'NO FRESH ASSESSMENT OF COSTS AND BENEFITS OF DEMONETISATION':
MANMOHAN SINGH
After one year, India's former Prime Minister Dr Manmohan Singh gave a speech in the gathering of businessmen in
Gujarat's Ahmedabad yesterday. Singh was quoted by ANI as saying: "Tomorrow we mark one year since the disastrous
policy was thrust on the people of our country."
He added that the government has not made a fresh assessment of costs and benefits, if any, of the move.
The former prime minister termed November 8 as a 'black day' for the Indian economy and democracy. "I repeat what I said
in the parliament, this was organised loot and legalised plunder," he said in his speech.
The biggest blow for PM Modi, who faces re-election in early 2019, is that growth has slowed to levels last seen during his
predecessor's administration. India's previous government was criticised for massive corruption scandals and a policy
paralysis, helping Modi sweep to power in 2014 with the biggest mandate in three decades.
REASONS FOR BRINGING DEMONETIZATION, ACCORDING TO PM MODI:
 To include digitization and boosting the number of tax payers
 To fight corruption
 To fight counterfeiting
 To remove black money
But is it happening?
HERE ARE THE CHANGES INDIA SAW AFTER A YEAR OF
DEMONETISATION:
1. Formalising Indian economy and ensuring better jobs for the poor: 50 lakhs labourers got their bank accounts active
according to Modi's Twitter account and 1.03 crore registrations of labourers took place in ESIC (Employee's State
Insurance Corporation).
2. Decisive blow to terrorism and naxalism: In Naxal-affected states, terror incidents are down 45 per cent, according to
data from the South Asia Terrorism Portal or SATP.
3. Unprecedented growth of imports -- rose by 23 per cent in a year: Comparing the escalating rise in India's imports
from China, the country's import in first half of 2016-17 stood at Rs 1.96 lakh crore, whereas in 2017-18 it was increased to
Rs 2.41 lakh crore.
4. All cash withdrawn has been translated into a rise in bank deposits: After the cash ban was announced last year, only
about a third of the Rs 15.44 lakh crore of invalidated bills wasn't deposited into banks, while the rest of the money made
bank deposits rise.
Economic Affairs Secretary Subhash Garg estimates: "So the potential of storing black money is so much reduced. You are
doing the same economic activity with the money in circulation."
5. Reduction in storing the black money and so does the money in circulation: India would have had some Rs 18 lakh
crore in high-value bills today if it wasn't for demonetization -- instead it has Rs 12.5 lakh crore.
6. Spending hours in long queues to withdraw money led to deaths: After one month of the announcement of
demonetization, in 720 hours, there were 720,000 deaths, as reported by Forbes on December 8, 2016.
7. Labourers in the textile, footwear, plastic and metal industry got adversely affected: Labourers from Delhi have been
compelled to leave National Capital Territory after demonetisation as they are unable to get money.