Demonetisation: How An Ambitious Idea Turned Out To Be A Nightmare

Posted on November 22, 2016 in Business and Economy

By Fahad Hasin:

On November 8 2016, Prime Minister Narendra Modi surprised the entire nation. In an economy like India where 95% of the transactions are still done in cash, the government demonetised Rs. 500 and Rs. 1000 currency notes which constitute around 86% of our currency. The government called it a ‘game changer’ against black money. It is a well known fact that most of the black money is in real estate, jewellery, tax havens, stock market, etc. Yet, I wholeheartedly supported this decision initially as I thought it would at least wipe out a large proportion of black money and it will also stop the menace of counterfeit currency notes which hamper the economy of the country at the cost of ‘minor inconveniences’. At that time, I was not aware of black money distribution data and the other side of the story.

From the beginning, I was of the opinion that the impact on black money is being overstated but at least it will make our currency free from counterfeit notes.

Since then, I have been very disappointed with the horrible execution and some serious allegations. The allegations are not baseless but based on logic and facts. Let’s take a look at some recent developments:


Inconvenience and massive turnout at banks was expected as India is a very large country with a massive population. However, the government claimed it was planning this for the past six months and the process will be efficient (with some ‘minor inconveniences’). The situation after a couple of days was by itself self-explanatory and pointed towards poor planning and horrible execution. As new details emerge, the intention of the government is also being doubted.

Why I Call It Poor Planning

One of the biggest examples of poor planning is the condition of the ATMs. The Prime Minister and Finance Minister claimed that ATMs will not work on November 9 and some will also not work on November 10. The Finance Minister claimed that all the ATMs will be functional from midnight of November 10. Unfortunately, as on November 13 2016, more than half of the ATMs (even in urban areas) are non-functional and among the rest of them, most of the ATMs are out of cash.

The dimensions of the new currency notes is different from the existing ones. So, the ATMs are not equipped to dispense new notes as it requires machine recalibration, said a Hindustan Times report. For this, an engineer has to physically visit every ATM and the reconfiguration could take three to four hours. There are 2.2 lakh ATMs across the country, which means if 10,000 engineers are pressed into service, they will take at least 10 days to complete the job. Simply put, the long queues and chaos at ATMs are not going to go away soon.

“ATMs could not have been calibrated (before the announcement) because of secrecy issue. Thousands of people are involved in recalibration exercise (and) secrecy could not have been maintained,” said Mr. Arun Jaitley, Finance Minister of India.

A simple solution would have been to design the new notes with the earlier template so that ATMs don’t need recalibration.

On November 10, the Finance Minister claimed that all ATMs will work properly from midnight. On November 12, however, he said, “Recalibration takes at least 2-3 weeks.”

“It’s like pushing you off the plane [and] then ordering for [a] parachute,” says Shirish Kunder.

Did nobody, repeat nobody, think of testing the new Rs. 2000 note in an ATM beforehand? It appears so! Did the government realise that all the ATMs have to be recalibrated only after the announcement was already done or was it intentionally done so that people are deprived of cash and are forced take help from touts who are easily exchanging the currency notes by charging a commission of 10-20% – an allegation made by Delhi CM Arvind Kejriwal.

According to CM Kejriwal, all these touts are actually BJP men who are taking any amount of money in the denomination of 500 and 1000. Since they are their own men, they are easily able to exchange any amount of currency and the commission that they earn will be used by the BJP in their election expenses.

I leave it to you to judge whether it was their poor planning or a planned scam – in both cases the government is at fault.

Rs. 500 Currency Notes Are Still Not Available

As of November 12 2016, the new Rs. 500 notes are still not available at any bank in India. Only Rs. 2000 notes are available at banks which only a few people have received after waiting in the queue for an entire day. Some, even after waiting in the queue for the whole day return empty-handed. Even after some people received Rs. 2000 notes, it is still useless (here’s why).

Don’t you think that instead of Rs. 2000 notes, the government should have focused on printing Rs. 500 notes first so that the liquidity in the market returns more quickly?

Who Are The Worst Affected?

There are reports of massive inconveniences from across the country. Of course, it was expected that there will be inconveniences since this is a very big exercise but the reports are even worse than expected.

– Reports of multiple deaths (due to people waiting in queues).
– Reports of multiple deaths across India as many hospitals and ambulances refuse to take the Rs. 500 or Rs. 1000 currency notes. Most of the pharmacies are also unwilling to accept old notes.
– The rural population, which constitutes around 70% of the total population of India, is the worst affected as they don’t have proper access to bank accounts.
– Only 28-32% of Indians have access to financial institutions.
– The exchange form and other formalities at the bank to exchange old notes adds to more trouble for the illiterate population in rural as well as urban areas.
– Daily wage workers too are the worst affected. They are not able to perform their work as they waste their whole day in queues outside banks and end up without cash as banks run out of cash or end up closing.
– Even if daily wage workers are doing their job, they are not being paid as there is an acute shortage of valid currency in the market. Majority of the daily wage workers are paid in cash only.
– Small farmers are worried as they are unable to plough their land (before sowing seeds) which is done in the month of November. They generally save money in the form of cash to purchase seeds and other requirements for the season. As their cash has become useless, they are worried.
– The rural population and even many small towns in India still don’t have the option to digitally pay at a majority of the shops. People are unable to buy essential commodities.
Over 5 lakh workers in tea and jute industries have not been paid their daily and weekly wages. Industry leaders have written to RBI and the Government. Till now there is no response.
– Optimistic estimates say that about 53 percent of India has bank accounts.

The list goes on and on.

While urban citizens, who have access to alternatives like card payments, e-wallets, net banking, e-commerce, etc., may have no problem with ‘minor inconveniences’ for a ‘good cause’, let’s not be unfair to our rural population which does not have these alternatives. Most of them can’t even voice their outrage on social media!

Was It A Secret?

On November 6 2016, two days before the PM made the announcement about the demonetisation of currency notes, BJP’s Advocate (State) Co-Convener BJP Law & Legal Affairs Department Punjab, Sanjeev Kamboj tweeted about the new Rs. 2000 notes.

Days before the demonetisation announcement, Mohan Guruswamy, an economist who served as an adviser to Finance Minister Yashwant Sinha in Atal Bihari Vajpayee’s BJP government in 1999, fielded an unusual phone call:

“I’ve heard demonetisation will happen this week, what have you heard?” said a friend on the line, explaining that he wanted to go to Shirdi on pilgrimage, but was worried about his unaccounted cash pile. Guruswamy advised him to go on holiday, he hasn’t heard from the friend since.

Two weeks prior to that call, another acquaintance, a senior auditor, had told Guruswamy to expect demonetisation by December this year.

Photographs of new Rs. 2000 notes were doing rounds on WhatsApp among wealthy and politically connected businessmen and their friends. The photograph later went viral on Twitter.

On October 27 2016, a news report had already claimed that the government will launch new Rs. 2000 notes and all the existing currency notes in the denomination of Rs. 500 and Rs. 1000 may be demonetised.

All these facts refute Mr. Arun Jaitley’s claims that it was a super secret operation and that even none of the cabinet ministers knew about it.

If journalists, BJP’s Sanjeev Kamboj and many others knew about it, how is it possible that wealthy and politically connected businessmen, who are very close to the government, did not had any knowledge about it?

Is It Really A Crackdown On Black Money?

According to income tax data, less than 6% of the black money is in the form of physical cash. The rest is in real estate, tax havens, stock market, jewellery, etc. Isn’t it funny that a decision which will poorly affect the majority of the country’s population has been taken to flush out less than 6% of the black money?

Even flushing out that 6% of black money doesn’t seem practical because:

– Many big players already knew about this step. They’ve already made their arrangements.
– Many bigshots find it easy it is to exchange all their old currency with the new currency with the help of a number of touts who are easily accessible. They only charge a commission of 10-20%. So even if they did not have any knowledge about this move, there is still a solution.
– Almost all the black money hoarders are distributing all their black money in small proportions below INR 2.5 lakh to drivers and other staff.

It was expected that black money (in the form of cash) will be flushed out from the market and it will come into the system. After a detailed serious analysis, it comes out that the black money will only get redistributed between the black money hoarders and the touts but no significant amount of black money will be generated into the system.

“At Least It Is An Effective Measure To Curb The Menace Of Counterfeit Currency Notes.”  Will It?

I was always of the view that demonetisaton will not be an effective measure to flush out black money but it will definitely help us get rid of counterfeit currency notes. Now, even this becomes doubtful as more details come out.

The new currency notes have all been printed at a facility in India but, barring the design, the security features remain the same as the old Rs.500 and Rs.1000 notes (Sorry friends, no GPS chips).

“Since the decision to introduce the new notes was taken only six months ago, there was no time to alter the security features. Only the design has been changed but the security features remain the same as the new notes,” a senior RBI official said.

If there are no new significant security features, how will it curb the menace of counterfeit currency notes? Would it not have been better if new security features were added so that it becomes an effective step in curbing counterfeit currency? Of course, that would have taken much more time but it was totally worth it as demonetisation is a huge exercise so it can’t be done frequently (moreover, it’s expensive). They could have utilised this opportunity in a much better way. Also, many people are not satisfied with the quality of the new currency notes.

Is it that the RBI was not given much time to add new security features to currency notes so that the government could claim credit and grab headlines in its present term?

Is This All Hardship And Suffering Worth It?

With these new details emerging, everyone has this question: is this all worth it?

From the details above, it is quite clear that this move will not have any significant impact on black money. Moreover it will not be an effective step to curb the menace of counterfeit currency notes (of which it had the potential). All it has resulted in is chaos, panic, public inconvenience, wastage of productive time, deaths, tragedies, etc.

Look at the queue outside any bank. Who are the people standing there? A majority of them are poor and working class people. Almost no wealthy black money hoarder is standing in those queues as they have already made arrangements.

Another question is that, is the monetary loss due to loss in productive time worth the economic gain? For a few days, the markets wore a deserted look, most of the jewellery shops were closed as they feared raids and almost all the small business had paused.

While the public initially hailed the Prime Minister’s stance to wipe out fake notes and curb black money, the liquidity crunch, the queues at banks and the harassment have resulted in a swing in the public mood.

According to World Bank Chief Economist and India’s former chief economic advisor Mr. Kaushik Basu, the damages due to demonetisation is greater than its benefits.

Surprisingly, former RBI governor Raghuram Rajan and BJP MP Subramanian Swamy both have similar opinions on the government’s demonetisation decision. Both of them are of the view that demonetisation is not an effective way to deal with black money.

 Final Word

It appears that the propaganda about demonetisation as a game changer and effective solution of black money is just a sham. The BJP government has successfully proclaimed itself as an anti-corruption government. Stories of missing JNU student Najeeb Ahmed, unjustified detention of opposition leaders, the OROP debate, NDTV India ban, controversial Bhopal encounter, etc., have vanished from the media as well as from the minds of the common man (as of now).

I hope that the government will declare the total amount of tax from the black money recovered from deposits in bank accounts between November 9 2016 and December 30 2016 and also the total monetary loss due to wastage of our productive time, force, logistical expenses, etc.