Modi's cash ban failed in its two big objectives

Aug. 31, 2017 Share Source

The objective behind India's abrupt cash ban was to crack down on criminal activity. News that the cash ban did not stop the shadow economy from exchanging illicit funds for legal tender leaves the world questioning the so-called benefits of the brutal policy.

India's central bank reports that 99% of the high-denomination notes made worthless in Prime Minister Modi's 2016 snap cash ban have been returned - approximately 15.28tn rupees ($242bn).

Catch up: Read BBC's India's cash crisis explained
In an unscheduled televised address on 8 November Prime Minister Narendra Modi gave the nation just four hours notice that 500 ($7.30; £6) and 1,000 rupee notes would no longer be legal tender.

The Government of India expected to see a vast amount of illegal money disappear due to tax avoiders and criminals not wanting to be identified when exchanging undeclared wealth for legal tender. But even six months after the policy was put in place - when the government expected a third of the notes to disappear - over 97% had been returned.

The cost of the failed policy was most felt by the working class Indians, traders, unbanked and ordinary savers. Considering that the informal economy makes up 80-90% of the workforce in India, it was the employees who work in agriculture, construction or home-based services who suffered the consequences. 

"India's demonetisation is unprecedented in international economic history, in that it combined secrecy and suddenness amidst normal economic and political conditions. All other sudden demonetisations have occurred in the context of hyperinflation, wars, [...] or other extreme circumstances."
" p. 54 Economic Survey 2016-17 Ministry of Finance, Government of India

Excerpt of Viewpoint: Why Modi's currency gamble was 'epic failure' by Vivek Kaul

Has demonetization been a success or a failure? As per the RBI data, it's safe to say that demonetization has been a failure of epic proportions.

The conventional explanation for this is that most people who had black money found other people, who did not have black money, to deposit their savings into the banking system for them. 

As far as counterfeit notes go... The total number of notes withdrawn stood at 24.02bn. This basically means that as a proportion, the counterfeit notes identified between April 2016 and March 2017 represent close to 0% of the withdrawn notes.

In the previous year, the total number of counterfeit 500 and 1,000 rupee notes detected stood at 404,794. And this happened without any demonetization...

Read full Viewpoint article here

Read about India's cash crises six months later

Read about The impact of India's snap cash ban on the informal economy

Vivek Kaul is the author of India's Big Government - The Intrusive State and How It is Hurting Us.

Last Updated: Sept. 1, 2017