What is Demonetization?
On 8 November 2016, the Government of India announced the demonetization of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series. It also announced the issuance of new ₹500 and ₹2,000 banknotes in exchange for the demonetized banknotes. The Prime minister of India Narendra Modi claimed that the action would curtail the shadow economy and reduce the use of illicit and counterfeit cash to fund illegal activity and terrorism.
The announcement of demonetization was followed by prolonged cash shortages in the weeks that followed, which created significant disruption throughout the economy. People seeking to exchange their banknotes had to stand in lengthy queues, and several deaths were linked to the rush to exchange cash.
Initially, the move received support from several bankers as well as from some international commentators. The move was also criticized as poorly planned and unfair, and was met with protests, litigation, and strikes against the government in several places across India. Debates also took place concerning the move in both houses of the parliament.
The government said that the main objective of the exercise was curbing black money which included income which had not been reported and thus was untaxed money gained through corruption, illegal goods sales and illegal activities such as human trafficking; and counterfeit currency. Other stated objectives included expanding the tax base and increasing the number of taxpayers; reducing the number of transactions carried out by cash; reducing the finances available to terrorists and radical groups. The push for the digital payments was one of the stated intention of the demonetization. There was immediate and sharp jump in the digital payments in November–December 2016 owing to shortage of cash.
Outcomes and impact of demonetization.
The scarcity of cash due to demonetization led to chaos, and people faced difficulties in depositing or exchanging the demonetized banknotes due to long queues outside banks and ATM across India. The ATM were short of cash for months after demonetization. There was a reduction in industrial output as industries were hit by the cash shortage.
Transactions in the agriculture sector are heavily dependent on cash and were adversely affected by the demonetization. Due to scarcity of the new banknotes, many farmers have insufficient cash to purchase seeds, fertilizers and pesticides needed for the plantation of rabi crops usually sown around mid-November. The shortage of cash led to plunge in demand which in turn led to a crash in the prices of crops. Farmers were unable to recover even the costs of transportation from their fields to the market from the low prices offered. Some farmers dumped their produce in protest against the government.
There was a loss of jobs and decline in wages due to demonetization, particularly in the unorganized and informal sector and in small enterprises. Migrant workers were adversely affected by demonetization.
Demonetization negatively impacted the Midday Meal Scheme due to shortage of funds.
Several people were reported to have died from standing in queues for hours to exchange their demonetized banknotes. Deaths were also attributed to lack of medical help due to refusal of demonetized banknotes by hospitals.
The sudden nature of the announcement—and the prolonged cash shortages in the weeks that followed—created significant disruption throughout the economy, threatening economic output.
The demonetization move was heavily criticized as poorly planned and unfair, and was met with protests, litigation, and strikes.
The announcement was sudden and unscheduled. It was a live television address at 8PM on November 8, 2016. In the days following the demonetization, the country faced severe cash shortages with severe detrimental effects across the economy. But after sometime everything become normal like before. Three years on, still no clarity on if demonetization was a success or a failure.