Midnight, November 8, 2016. While the Americans were rejoicing or lamenting the victory of Donald Trump as president of the USA, India was fumbling with suddenly valueless pieces of paper, as the result of one of the boldest government move since the establishment of the Indian republic. Indeed, on the eve of the Indian independence, when the first Prime minister Nehru said that ”at the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom”, he would not have imagined that, 69 years later, history would have repeated itself. India did awake itself, but not to life or freedom; instead, it awakened to a surprise television speech by the Indian Prime Minister Modi, for the immediate cancellation of all 500 and 1,000 denomination notes by midnight of 8th November 2016. This counted for 86% of the currency in circulation and the country’s 1.3 billion people was given a 50-day window to either deposit them into their bank accounts or to exchange them for newly designed and minted notes. More than a year later, the effects of the decision are still evident.
The main aim of such a move was to scoop out the immense amount of unaccounted wealth from the economy, to lower cash circulation, which according to the government, is directly related to corruption, and eventually more towards a more digital and cashless society. But its success remains debatable among Indian economists – 97% of the notes were back in circulation by august 2017, according to the Reserve bank of India, meaning that very little black money was actually caught and the use of cash in the society was only 9% less a year after demonetization. As a further blow, the fiscal growth in the next two quarters after the decision decreased from 7,9 to 5,7.
While some predict that the move has several long term microeconomic benefits, the question is whether it was all worth it, because what politicians and economists often did not take into account is the plight of the common man. And this was certainly one of the biggest difficulties that came with the lack of proper planning for the decision – hours of line of waiting at the banks and the ATMs, scarcity of currency etc. And more dramatic consequences – small scale farmers, who depend on cash currency for their everyday activities, had insufficient cash to purchase inputs for their farming, or for the common public to buy food produces, resulting in a big decline in the agricultural sector. When only 60% of the population of the country has bank accounts, it is difficult to imagine a digital society. This push towards digitalization or legitimization of unaccounted wealth could have been conducted in a less painful way.
Moreover, another question can be raised about the legitimacy of the whole procedure. The fact of changing goalposts several times was not the most reassuring factor of the whole procedure, nor was the fact that the Union government acted without the counsel of the Reserve bank of India, unlike prescribed. Severe doubts can be raised if the whole procedure was just a political set up in the name of patriotism, to ensure votes in the next election, considering the number of well thought loopholes there were – exemption of all religious trusts from demonetization being an evident example. There was an attempt to establish the present government as the messiah of the poor – however, when we look at the figures for wealth distribution in India a quarter after demonetization – the richest 1% held 58% of the total wealth, one of the most unequal distribution of resources in the history of the country and hence the ones affected the most by demonetization were the poorest in the informal sectors which crashed because of a lack of cash flow and even costed some their lives. While India’s demonetization was far from a success, it was indeed a good lesson for the world on what not to do.