In 2016, the Indian government introduced a demonetisation policy. At that time, India’s cash-to-GDP ratio was only 12%, lower than Japan’s 20%, Germany’s 15%, and Switzerland’s 10%. The majority of cash in circulation were 500 and 1000 rupee notes. Before the policy, currency in circulation had steadily increased and reached 16.42 lakh crore rupees. As of March 2022, the Indian currency in circulation has significantly risen to Rs 31.33 lakh crore from Rs 13 lakh crore in 2014. The demonetisation policy is still a significant disaster in India’s economic history.

It’s important to mention that RBI favoured increasing cash circulation before the demonetisation event. You can find more information in the attached article.

https://thewire.in/economy/india-gdp-demonetisation

During the fiscal year 2022, the proportion of currency in circulation (CIC) to India’s gross domestic product (GDP) was almost 14%. Following the demonetisation in 2017, the CIC ratio significantly increased once again.

Share of currency in circulation to GDP in India from the financial year 2015 to 2022

‘Velocity’ of money and Currency Denomination 

The ‘Velocity’ of money measures how quickly money is exchanged in an economy, indicating the economic activity level. For instance, if ten people use 100 rupees within a specific time frame, it generates an economy worth 1000 rupees, showing the impact of money circulation. The ‘Velocity’ of money is a crucial factor in determining economic health because it reflects how often and how fast money moves within an economy, driving transactions and promoting economic development.

In the economy, the denomination of currency plays a vital role in the ‘Velocity.’  of Money.

To understand this concept, let’s use an example where you have a 200-gram weight and a weighing machine. Giving your neighbour 130 grams of sugar using a 200-gram weight would be impossible. You can measure accurately if you have standard weights like 100 grams, 20 grams, or 10 grams, and a standard set of weights allows you to provide or sell the desired weight.

Similarly, if you want to purchase something for 130 Rupees, it’s crucial to have a combination of currency denominations that adds up to that amount. Having 100-Rs, 20-Rs and 10-Rs notes would allow you to pay seamlessly. In contrast, having only one unit note would be impractical and inconvenient, and a high-value denomination like a 2000 unit note would be challenging to use for smaller transactions efficiently.

To ensure smooth transactions, currency notes come in various denominations that align with the average ticket size of transactions in a country. For example, the Reserve Bank considers typical transaction amounts when printing money in India. By providing a range of denominations, currency notes enable practical and convenient transactions, allowing individuals to make payments efficiently according to the value of goods and services they purchase.

Demonetisation – November 8, 2016.

On the day of demonetisation, a massive sum of 16.43 L crore was withdrawn from the economy, leaving a void that needed to be filled. Let us use an example to understand the options available.

● Printing only 2000 Rs notes 821.5 crores of 2000 rupee notes

● Printing 50% 100 Rs and 50% 500 Rs notes 8.215 lakh crores of 100 rupee notes and 1.643 lakh crores of 500 rupee notes.

During demonetisation, it would have been quicker to print 2000 rupee notes compared to 500 and 100 rupee notes. This could have influenced the decision to print more 2000 rupee notes to speed up remonetisation. The decision to demonetise was likely made only a few days before the event, and the RBI had to print the necessary currency without seeking expert opinions or following a well-planned program.

The abrupt elimination of currency caused chaos and difficulties, leading to despair and loss of life. When the economy was re-monetised, the circulation of only 2000 rupee notes worsened the situation. The effects of demonetisation were significant – the ‘Velocity’ of money decreased significantly due to a lack of currency, bringing the economy to a halt; the introduction of the 2000 rupee notes delayed the recovery accentuating the problem and hurting the economy further.

It was a tough time for everyone involved, and the effects were felt for a long time.

Conclusions 

If you struggle with being overweight, you cannot run like a ‘forest gump’ and lose weight overnight. Creating a plan that includes exercise and a healthy diet is essential.

In the same way, transforming the economy is a gradual process, and military terms like “surgical strikes” are just marketing tactics that don’t address the issues at hand. Demonetisation was a disastrous step that revealed a crucial lack of economic understanding, and it disrupted the circulation of money, and introducing the 2000 rupee note only further delayed recovery.

The RBI reports that the value of these banknotes in circulation has gone down from ₹6.73 lakh crore on March 31, 2018, which accounted for 37.3% of all notes in circulation, to ₹3.62 lakh crore on March 31, 2023. This now represents only 10.8% of all notes in circulation.The discontinuation of the 2000 rupee note and the deposit limit of ₹20,000 per visit creates unproductive work for banking staff. The impact on those who travel to make deposits and the opportunity cost are still unknown. This exercise is a waste of resources and causes a loss of productivity.

It would have been prudent if the Reserve Bank of India had gradually reduced circulation without a big announcement.

The mistake made in 2016 by a leader who acted without seeking consensus or expert advice has become even more apparent. Unfortunately, we are all now paying the price for this decision.

The author is a financial professional with a master’s degree in economics. He is interested in the arts, academia, and social issues related to development and human rights.

Also Read:

Part 2: Addressing Mammoth Task of Depositing ₹3.62 Lakh Crore (2,000 Rs Notes) :  Scale, Assumptions & Effort

Related:

Challenge to demonetisation not academic : SC seeks affidavits of both Union & RBI, including RBI decisions at the time

RBI data reveals demonetization was a failure, 99% of banned cash recovered

Money Mayhem – Demonetisation Cartoons

Demonetisation: The grandest of blunders made by anyone in Indian political history?

Modi’s RBI and its myopic monetary measures

The post “Demonetisation: Modi’s Himalayan Blunder and its Lingering Consequences” (Part 1) appeared first on SabrangIndia.

 
Datum 2: Currency in denominations of Rs 500 and Rs 1,000 increased 50% over three years (from Rs 9.6 lakh crore in 2012-13 to Rs 14.1 lakh crore in 2015-16), according to RBI data, while India’s gross domestic product (GDP) increased 22%, and per capita income rose 18% over this period.
 
With the base created by bank accounts linked to Aadhaar, the national identification system, and the upcoming Unified Payments Interface, which will offer payments through mobile phones linked to bank accounts through a unique number, demonetisation will help speed the transition of a predominantly cash economy to a cashless one, Nandan Nilekani, former chairman, Unique Identification Authority of India, told Mint.
 
At the same time, the shadow economy–meaning people do not account for it and do not pay taxes on it–is about a quarter of India’s GDP, according to this 2016 note from the finance ministry. Only 1% of India’s population pay income tax, according to Income Tax department data.
 
Prime Minister Narendra Modi on November 8, 2016, announced a war on black money, declaring that two currency denominations Rs 500 and Rs 1,000–which constituted 85% of cash with Indians–were no longer legal tender. His intention was to have money earned legitimately but held in cash deposited in banks and unaccounted money rendered useless.
 
As banks reopened after a mandatory one-day closure on November 10, and ATMs reopened on November 11, Indians thronged them, mostly to deposit available money rather than withdraw it or exchange old notes, evident when IndiaSpend visited various banks in Mumbai and Delhi.

 
15 years ago, notes of Rs 100, Rs 50, Rs 20 and Rs 10 were 70% of the cash economy
 
It was in 2004-05 that the value of Rs 500 and Rs 1,000 notes put together exceeded the value of all other denominations, namely Rs 100, Rs 50, Rs 20 and Rs 10.
 
In 2000-01, denominations other than Rs 500 and Rs 1,000 constituted 70% of the cash in the economy; they constitute 15% today. 

Source: Notes and coins circulation, Reserve Bank of India
 
The value of money made up by Rs 500 and Rs 1,000 notes went up from a quarter of cash in circulation in 2001 to 85% in 2016. 
 
The currency with people rose rapidly during the last three years–2013 to 2016–against deposits kept by people in banks, RBI data show.
 
From being almost equal in 2007, currency with Indians was 50% more than bank deposits in these three years. 

Source: Reserve Bank of India Bulletin

 
Rural bank branches rise 28%, rural ATMs 200% in 3 years
 
The Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) government, in its first budget in 2014-15, announced the Pradhan Mantri Jan Dhan Yojana (Prime Minister Financial Inclusion Scheme) to boost financial inclusion in the country. As many as 250 million bank accounts have been opened in two years to 2016.
 
There are 132,834 bank branches in India, of which 38% (50,554) are rural, according to RBI data. Rural branches rose 28% from 39,368 in 2013 to 50,554 in 2016.
 
However, in the last two years, the rate of addition of rural bank branches has slowed down while the rate of addition of urban branches has remained fairly constant.
 
There is one bank branch per 10,000 Indians while there is one ATM per 5,000 Indians.
 
State Bank of India, the biggest bank in India, has close to 50,000 ATMs. The State Bank group—six banks under the State Bank banner—has more ATMs than all private bank ATMs put together across India.
 
Maharashtra, India’s most industrialised state, has the highest number of ATMs. But, the density of ATMs—machines per million population—which determines the ease with which people can access their money, is the highest in Tamil Nadu with more than 343 ATMs per million people.

 

Source: Reserve Bank of India
 
Maharashtra comes a distant fifth in ATM density amongst the big states in India with 208 ATMs per million. Bihar is worst among the big states with 74.
 
ATMs in rural areas have increased 200%—or tripled—in three years from June 2013 to June 2016 when the total number of ATMs rose by 75%. 

 
Source: Reserve Bank of India
 
The number of debit cards in India more than doubled between 2012 and 2016. Over the same period, point-of-sale or PoS machines—the credit/debit card-swiping machines in hotels and shopping malls—also more than doubled. 
 
All these have contributed not just to financial inclusion but also to making a gradual shift towards cashless economy, which reduces dependence on cash.
 
Online transactions through the National Electronic Fund Transfer—popularly known as NEFT—rose from Rs 4 lakh crore in 2009-10 to Rs 83 lakh crore in 2015-16, a 2000% rise. 

Source: Monthly Bulletin, Reserve Bank of India
 
Businesses that work on cash and credit are are in a dilemma after the currency shock. E-commerce firms have discontinued cash-on-delivery option, and daily sales have reduced, e-commerce experts told IndiaSpend.
 
(Waghmare is an analyst with IndiaSpend.)

Courtesy: IndiaSpend

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In the midst of the hubbub surrounding the secrecy of PM Modi’s plan to eliminate the currency notes of Rs 500 and Rs 1,000, an image of a clipping from a Gujarati newspaper doing rounds on WhatsApp and Social Media is leaving readers perplexed.
 
The clipping from a Saurashtra-based Gujarati newspaper Akila dated April 1 declares that the government has taken a decision to remove the 500-Rupee and 1,000-rupee notes from circulation. This news dates back to a month before Modi government had even conceived the plan, which is said to have happened around six months ago, i.e. in the month of May, according to the news reports. 
 
Clarifying on the image of the report that has left many befuddled, Kirit Ganatra, managing editor, Akila Press told SabrangIndia, “The story was printed as a joke on April 1, since it was the April Fools' day. Many newspapers from Saurashtra follow the tradition of printing a spoof news report on April 1 and we do it every year. Coincidentally, it turned out to be true this year.”
 
When asked about the uncanny similarities between the spoof report and the actual decision to scrap the said currency, he said, “People have been discussing and suggesting this move as a solution since quite a long time. This solution seems pretty obvious when one thinks about the possible ways to deal with the black money in the country. That’s why we wrote so in the spoof report. We had no access to any inside information whatsoever.”
 
However, the details of the announcement by PM Modi mysteriously match with the information mentioned in the Gujarati article.
 
A Loose translation of the report is summarised below: 

‘Decision to Remove 500-100 Notes from Circulation’
 
Whoever has Rs 500 or 1000 notes, should go and change them before June 30. Transactions for higher than Rs 2,000 have to be done through electronic cards, debit cards and electronic means only. Cash more than a certain amount cannot be kept at home. These are some of the moves to stop the flow of black money and corruption, as decided by Narendra Modi on the conclusion of two years his government.
 
News of this historic decision has come to light. Use of fake currency for terrorist and anti-social activities will thus be stopped. Notes of these denominations in the possession of people should be surrendered by June 30.

By this move, black money will be cleaned and India will surge forward. The government’s move will have no impact on ordinary people and is only meant to expose the corrupt and those functioning with black money currency.

 
One of the differences between the spoof report and the real incident is that the spoof talks about a three-month-window to return the currency. But, the announcement by PM Modi on November 8 prompted overnight scrapping of the said currency, while he also introduced design of the new notes of Rs 500 and Rs 2,000. Nonetheless, the mention of one of the intents of the move to deal with terrorism remains the same in both the stories.

While the planning to execute the so-called biggest move was reportedly kept secret from Modi’s own cabinet until Tuesday afternoon, reading about its details in a paper from even before the conception of the plan raises eyebrows, and some hard questions.

Also read: Modi Government’s Move Insensitive to Common People, Reveals a Blinkered View of Black Money: Prabhat Patnaik
Also read: क्या है असली राज़ प्रधान मंत्री के सनसनीखेज कार्यवाई के पीछे? 9 सवाल

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