Today marks the first anniversary of the (in)famous demonetisation day. On 8th November, 2016, at around 8 p.m. IST, in an unscheduled televised address, Prime Minister Narendra Modi announced to 1.3 billion citizens of the largest democracy that Rs 500 and Rs 1000 will be invalid past midnight. These notes will be replaced by new Rs 500 and Rs 2000 notes.
The purpose of the exercise, he highlighted, was to counter black money, counterfeit currency and to counter terrorism. In a frenzy, over a billion Indians scrambled and scratched their heads to make sense of the situation. What followed was the turmoil of the citizens making their way to long queues outside banks and ATMs. A report suggested, around 33 people had died due the exhaustion of standing in long queues. There were further reports of 88 deaths after being denied medical attention when people were trying to pay in the demonetized Rs 500 and Rs 1000 notes.
Whether the objective was achieved or not, we will never know but according to the RBI, 99% (Rs 15.28 lakh crore) of the demonetised notes made their way back into the banks. The Reserve Bank, however, does not have data on the amount of black money recovered, and the extent to which the exercise has curbed terrorism and it has little clarity on why only as little as Rs 16 crore worth of counterfeit currency has been recovered (fake currency in 2015 was Rs.51.3 crore and Rs 44.2 crore in 2014).
Given that the government claims that all demonetised money is back in the bank, it will be easier for authorities to identify black money. However, government’s expectation that at least Rs 3-4 lakh crore black money will perish outside the banking system was negated by reports that only about Rs 17,000 crore has been recovered from income tax raids post demonetisation.
In an interview to The Wire, Marxist economist Prabhat Patnaik made it clear that the “feeling that black money is basically a stock of money, which is put in pillow cases or trunks or underground is not the case. Black money is something which refers to a whole range of activities which are undertaken either illegally or in order to avoid taxes.”
Terrorism did cease in the immediate months following demonetization, with incidents of stone pelting in Kashmir decreasing. However, the number of incidents spiked up once the cash returned to the system.
The fourth quarter GDP for the last financial year fell to 6.1 percent, that was a steep decline from the 8 percent seen the fourth-quarter GDP of the previous financial year. GVA (gross value added) fell even further to 5.6 percent in the fourth quarter from 8.7 percent in the Q4 period of previous year. Jobs in informal sector were particularly hit. The agriculture sector took a beating as farmers didn’t have exchanged notes to pay for seeds, pesticides and fertilizers.
But it wasn’t all a wasted effort on the part of the government. Income tax filing for 2016-2017 increased by 25% to Rs 2.82 lakh crore and advance tax collection rose by 41% over the one-year period.Summarizing the effects of demonetization, Nobel Laurete and renowned economist Amartya Sen, in an interview with India Today, said, "It is a gigantic mistake, both in terms of its objective of dealing with corruption as well as the objective of one rapid jump of getting into a cashless economy. It’s a disaster on economy of trust. In the last 20 years, the country has been growing very fast. But it is all based on acceptance of each other’s word. By taking despotic action and saying we had promised but won’t fulfil our promise, you hit at the root of this."