India: Benefits Of Demonetization Lost – OpEd


In November 2016, Indian Prime Minister Narendra Modi sprang a surprise on the country by announcing demonetisation of high value currency notes.  After announcing the decision,  Mr. Modi  spoke to the surprised and confused people and explained as to why demonetisation was necessary. 

Mr. Modi said that considering the urgent need to wipe out black money circulating in the country, root out corruption  and eliminate counterfeit notes, he had taken this measure. While stating that demonetisation was one of the measures that he would initiate  to achieve the objectives, Mr. Modi also implied that curbing currency in circulation is a precondition to achieve such objectives.  

The demonetisation announcement was followed by long queues in front of the banks, causing hardships to people in several ways. 

Of course, the pledged admirers of Mr. Modi appreciated his courage of conviction to take such bold decision and sworn critics of Mr. Modi opposed his move bitterly. However, the  fact is that, by and large, common people in India viewed   Mr. Modi’s move as necessary and appropriate, which became clearly evident when Mr. Modi’s party was voted back to power with a clear majority in the subsequent election to parliament. The consensus view was that the demonetisation measure put huge fear in the minds of the corrupt people and black money holders and a huge quantity of unaccounted money was brought to light, which justified the demonetisation measure.

One of the claims made at the time of demonetisation by Modi government was that the currency in circulation would be significantly brought down and digitalisation would be promoted in a big way .

While the currency in circulation was significantly brought down immediately after demonetisation, the present ground reality is that the currency in circulation has now increased by over around 83% after the demonetisation period in 2016.

Soon after demonetisation, the currency in circulation fell to a low of about ₹9 lakh crore on January 6, 2017, nearly 50% of ₹17.74 lakh crore on November 4, 2016.

The currency in value terms has soared from ₹17.74 lakh crore on November 4, 2016, to ₹32.42 lakh crore on December 23, 2022. Currency in circulation, which was ₹18.04-lakh crore at end-March 2018, jumped to ₹31.34-lakh crore at end-March 2022 and further to ₹32.42-lakh crore as on December 23, 2022..

Have The Benefits Of Demonetization Been Achieved?

The question now is as to whether India has reaped the benefits of demonetisation measures subsequently. It appears that it has not happened, which is unfortunate.  

Due to such a high currency circulation level at present, the use of unaccounted money  (mainly cash) has now soared.  Recently, record seizures amounting to Rs.6.6 crore in cash were made in one single assembly constituency in Telangana.  Almost every day, news Is appearing in the media that Enforcement Directorate and Income Tax authorities have been conducting raids and seizing huge amount of cash from black money holders. Some people think that seizures of such  black money is only a tip of the iceberg.

With such large currency circulation, a parallel economy is now in full flow in the country, accompanied by corruption in government departments and business dealings. Real estate deals are now increasingly being done by cash transaction using black money.

The country seems to be back to square one at present, with the parallel economy happening and increasing at an alarming level.

What Justification?

The Government of India has not so far provided any credible explanation for increasing the currency in circulation multi-fold, which is much against the objective pronounced by the Prime Minister at the time of announcing demonetisation. 

Some economists justify such huge cash in circulation by stating that it is necessary, as the national economy is growing at a very impressive rate and people and business houses need cash to meet their requirements. Another argument that is advanced in favour of increase in currency circulation is that so long as people pay tax properly directly or indirectly, total amount of cash in circulation is not a matter of concern. To support this view, it is pointed out that the GST (Goods and Services Tax) collection has been increasing steadily. Further, it is argued that even as cash in circulation is increasing multi-fold, the digital transaction has also been increasing significantly.

There appears to be some fundamental flaw in the above argument and  there should be a better way of fiscal management than printing currency notes in a developing country like India, unlike the USA.

In the last few years, the Government of India has been spending huge money by way of subsidy support, extending cash benefits to the farmers and welfare measures and distributing free vaccines, particularly to reduce the sufferings of the people during the COVID period.  

With the significant increase in currency circulation by the Reserve Bank of India, the Government of India collects the money from the people in a variety of ways by issuing bonds etc. and several state governments also do so.

Benefits Undone

This strategy of the Government of India amounts to finding a short term remedy for a long term problem, which is bound to be counter productive in the long run.

The net impact of the overall Rs.32.12 lakh crore currency in circulation at present is that the benefit of demonetisation  has been undone, resulting in disturbing level of growth of parallel economy and corruption in the country.  

It is necessary to note that increase in tax collection by the government is nowhere in proportion to the huge increase in the cash circulation in the country. 

Finally, the increase in currency circulation has resulted in steep increase in the price of goods and services, creating huge burden on the family budget of those living in lower and middle income group, pensioners and those belonging to the unorganised class in the country.

N. S. Venkataraman

N. S. Venkataraman is a trustee with the "Nandini Voice for the Deprived," a not-for-profit organization that aims to highlight the problems of downtrodden and deprived people and support their cause. To promote probity and ethical values in private and public life and to deliberate on socio-economic issues in a dispassionate and objective manner.

2 thoughts on “India: Benefits Of Demonetization Lost – OpEd

  • January 28, 2023 at 8:36 pm

    The propensity for corruption and underground economy is deeply entrenched since independence. Such practices cannot be eliminated with one demonetization and one Modi alone. It’s people at all levels who want to avoid paying GST, and in turn allowing businesses to hide real income and avoiding paying income tax. The cost of list revenues to the GOI are enormous. Unless the author N.S. Venkataraman, is avowed anti Modi and a bad journalist, how did he miss the record increases in digitizing of Indian economy through tools indigenously developed – now an envy of the world. The foolish argument in this article seems that since the underground economy is re emerging, it did not make sense to go through demonetization, rather looking at the benefits it has already delivered. The corrupt and the betrayers of dream of India will continue to find ways to defeat laws, but Modis are needed to take bold steps to put checks on those practices, rather than previous Congress which participated and slept with corrupt players at all levels.

    • January 29, 2023 at 3:26 am

      It is not clear what these so called benefits of demonetizations are. Originally it was to combat terror money send to Kashmir (a failure) then it was to kill the underground economy (also a failure) and now it is for digitization of economy


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