Demonetisation was really needed to curb black money and clean up our economy. But not the type of demonetisation government performed. We can take two scenarios. The first scenario is what government actually did and the second scenario is what government should have actually done.
First Scenario – Government demonetised 500 and 1000 rupees notes and introduced new 500 and 2000 rupees notes on 8th November 2016. They gave everyone time until 31st December 2016 to exchange the old denomination notes for the new ones. Since 85 percent of cash in the economy was in the form of high denomination notes, it caused a big shortage of cash in the economy. It also triggered long queues outside banks and chaos among people.
Majority of people in India are poor, uneducated and live below the poverty line, so obviously they didn’t have access to the banking system. So, they were the people who mostly suffered by standing in long queues for many days, difficulties in feeding themselves and their families. Even many deaths were caused due to this. All this also lead to lower consumption levels and higher unemployment in our economy, which hindered our GDP and economic growth.
However, the rich and the upper class people who are the actual holders of black money weren’t affected much or say at all. Since all of them are educated and have access to banking system, they didn’t face any shortage in their means for living. Also the people holding black money in old 500 and 1000 rupees notes were easily able to convert it to new 500 and 2000 rupees notes with the help of black money hoarders. So, basically the only people who benefited from this were black money hoarders and agents as they earned commission for this. This Demonetisation also could not prevent the future creation of black money. The black money was to be created again once the new 500 and 2000 rupees notes came into circulation.
Second Scenario – This is what government should have actually done. Government should have demonetised 100, 500, and the 1000 rupees notes. Yes, even the 100 rupees notes! Also they should have not introduced the new 500 and 2000 rupees notes at all. The economy should have been left with 50 rupees and other small denomination notes only.
One year prior to demonetisation, the government should have started replacing all the money in the economy from bigger denomination notes to smaller denomination notes. Although this would have been a little costly to print a lot more currency notes but it would have had long term benefits which the current demonetisation didn’t have. Then after a year of replacing the money in the system from larger to smaller denomination notes, the government should have demonetised 100, 500 and 1000 rupees notes.
This way the poor and uneducated people who didn’t have access to banking system would have not suffered as there would have already been enough 50 rupees and other small denomination notes in the system and circulation, which would have easily helped them to cover up their basic necessities.
Furthermore, there would have been no cash shortage, long queues and chaos among people. If there would have been any chaos, then it would have been only among people who had large sums of cash and who are the real holders of black money. They would have suffered as it would have been impossible for them to convert their millions and billions into 50 rupees and other smaller denomination notes. There would have been no/very less creation of black money in the future as it would have been very difficult for people to keep and handle large sums of cash in just 50 rupees and smaller denomination notes. The Indian economy would have itself became more digitalised.
It is said that India is a cash based economy. But it is said so because majority of the people are poor, uneducated and live below the poverty line and they don’t have access to banking system and digital means of payment. But if the people are poor and uneducated then it also means that their expenses are no more than just basic necessities. And so their expenses which include just basic necessities can be easily covered up with the help of 50 rupees and other smaller denomination notes as well. They don’t require bigger denomination notes such as 100, 500 and 1000 rupees notes for their living.
The bigger denomination notes such as 100, 500 and 1000 rupees are only required by people who have to make big transactions, which are not just for covering their basic necessities. The people who make big transactions are in minority and in the upper income segment and they obviously have access to education, banking system and digitalised means of payment. So if they have to make big transactions in the absence of bigger denomination notes then the only option they will have will be to use online and digitalised means of payment which prevents creation of black money in the economy.
If Demonetisation was performed in this manner then it would have had all the long term benefits that actual demonetisation intended to provide including – curbing black money, reducing the size of shadow economy in India and giving birth to a larger and a more formal digitalised economy.
By Lakshay Sachdeva