It was
around 8 at night, people were returning home after office, TV was switched on
as usual, PM was speaking at prime time, it was thought to be an usual
political speech that our PM tend to give. But, minutes later masses realised
that PM was announcing that 85% of cash in our hands will turn just pieces of
paper after midnight.
Initially, the general public didn't pay much heed to it, but as the news started pouring in on all channels, the people swung into action and lined outside petrol pumps, grocery shops, medical stores and supermarkets in order to change or use their high denomination notes.
The merits and demerits of the demonetisation row are being talked about. Interesting parallels have been drawn to nation love, patriotism and surgical strikes against black money by our clever, diplomatically "correct" ruling coalition.
The actual benefit or risk of this drive in the short, medium and long run is difficult to predict, only time has the capacity to answer all those. In order to understand DEMONETISATION better, its necessary for us to look back at the history of demonetisation in India. Yes it is not the first time this excercise is taking place. It is the third time to be precise, but nevertheless the largest, voluminous and substantive till date.
In a layman's language demonetisation means restricting out the total number of notes in circulation, rather than exchanging it. Exchanging 100% notes in hand doesn't lead to demonetisation, but it is more of a conversion of currency excercise. Precisely, this is the main reason why earlier demonetisation didn't work in India's favour .
The second demonetisation drive took place in January of 1978 under the Janta dal govt of Morarji Desai.
On 16 Jan 1978, the ordinance was announced via All India Radio at 9 AM. Banks and government treasuries were required to submit information (in the form of data ‘return’) to the Reserve Bank of India regarding high denomination notes held with them as at the close of business on 16 January 1978. The notes held would be exchanged for an equivalent value by the Bank. The general public was given three days to surrender high denomination notes for conversion. After 16 January, notes could be exchanged on tender of the high denomination notes in person by the individuals themselves or by a person competent to act on his/her behalf. They had to tender the notes at the Reserve Bank or at notified banks in the prescribed format with full particulars giving, among other things, the source or sources from which the notes came into his/her possession and the reasons for keeping the amount in cash.
This was a totally futile excercise. This time currency actually rose! Leave conversion or demonetisation, this was cumulation. Around 73.1 crore was the demonetised amount (Rs 1000 + 5000 + 10000) in 1977-78. Compared to this, 1067 crores were added by Rs 100 alone and the rest of the smaller denoms made up another 650 crores. So, it did not destroy any money stock at all. In 1946, atleast some bit was destroyed. The amount of denoms were also much smaller than seen in 1946. There were rumours also that demonetisation would take place, hence cash hoarders were well prepared.
Now comes the third demonetisation act, by the Modi government. After 38 years someone was again trying a failed method of driving out black money. The demonetisation this time was a bit different than earlier as, one it was a sudden surprise move by the govt and secondly it had given more time for exchange initially.
The big announcement came and naturally banks were not equipped to handle such a huge rush. Long serpentine lines could be seen and people faced a lot of hardships.Voices started raising against the govt's move and yet again the shrude govt linked demonetisation to nationality and patriotism. When it is a perceived matter of patriotism, none of the Indians have any complaint. They were all happy such a bold step is being taken place. In que it was a common conversation "dikkat to ho rahi hai, par chalo shi hai desh ke hit mai hai"(" we are facing problem, but it is ok, its in the nation's interest"). In the long run, it is in the nations interest or not is debatable, but in the short term it is suicidal to say the least.
Business has been forced to shut down. Consumption is rock bottom, even the thrirving industries of retail and online commerce are facing the hardship owing to the withdrawal of the popular COD through which 80% sales take place. The daily wage workers of the unorganised are not getting their payment. Sales and purchases by traders are down and dusted. The mandis are having a deserted look. Adding on to the woes, the foreign exchange and value of rupee via-a-vis dollar is a record low at 68.855. Experts feel this may touch the figure of 70 in a few months owing to the added effect of demonetisation. Hence, in the short term there is no bright spot.
But as the govt and the "patriotic" people, we are highly optimistic of the long term effects of demonetisation. Yes, there are differences from the previous demonetisation and this one. The first is obviously the scale at which it is happening. About 85% value of the total currency is out of circulation. In previous drives it was merely 30-40%. Secondly it is perhaps the first time common Indian as well as rich is being impacted, as earlier transactions with 500, 1000, and 10000 was not so common among average Indians. Thirdly perhaps, it is the first time that actual demonetisation (decreased number of circulating cash) is taking place as there are abundant alternative methods available like net banking, mobile wallet, card payment to name a few. This luxury was not available earlier and only cash could replace cash. In this the govt should also be congratulated for taking certain steps to move towards plastic economy by abolishing various cess and tax on card payments for the time being so that more and more people use it. Fourthly, it is for the first time that RBI is in favour of demonetisation, on the previous two occasions RBI was against it in principle. Moreover, India is a stronger and stable economy than the 70's or 40's and can tolerate such an impact better.
Having said all this, all the three moves have been primarily aimed at curbing black money and fake currency. But going by the earlier experience it is highly unlikely that black money will be out. According to experts only 10-20% of black money is in form of cash, rest are hoarded as gold, property and in the SWISS bank accounts of high profile people. Recently, news also broke out of fake Rs 2000 notes, so that aspect of the demonetisation is also under threat.
Nevertheless, it is a good move to begin with. But its futile, if not followed with other measures to weed out black money, fake currency and stop money laundering. The new Benami transaction act is a good followup along with incentivising card payment. Hope the government follows up with stronger and sterner steps and do justice to the sacrifice of the "patriotic Indian".
HARSHIT HAREENDRA
STUDENT
PIMS JALANDHAR
Initially, the general public didn't pay much heed to it, but as the news started pouring in on all channels, the people swung into action and lined outside petrol pumps, grocery shops, medical stores and supermarkets in order to change or use their high denomination notes.
The merits and demerits of the demonetisation row are being talked about. Interesting parallels have been drawn to nation love, patriotism and surgical strikes against black money by our clever, diplomatically "correct" ruling coalition.
The actual benefit or risk of this drive in the short, medium and long run is difficult to predict, only time has the capacity to answer all those. In order to understand DEMONETISATION better, its necessary for us to look back at the history of demonetisation in India. Yes it is not the first time this excercise is taking place. It is the third time to be precise, but nevertheless the largest, voluminous and substantive till date.
In a layman's language demonetisation means restricting out the total number of notes in circulation, rather than exchanging it. Exchanging 100% notes in hand doesn't lead to demonetisation, but it is more of a conversion of currency excercise. Precisely, this is the main reason why earlier demonetisation didn't work in India's favour .
The first
demonetisation drive took place pre-independence in January of 1947. The
Govt came out with 2 ordinances on 12 Jan 1946, which was declared a holiday.
First ordinance asked banks to furnish information about currency holdings of
various denominations (Rs.100, Rs. 500, Rs. 1,000 and Rs.10,000). Second
was about telling public that denominations of Rs. 500 and above were
demonetised and Rs 100 was spared. People were given 10 days for exchange which
meant first helpline ended at 23 Jan. This was later extended to 9 Feb
where people had to give explanations on why they could not in first ten days.
The measure
did not succeed, as by the end of 1947, out of a total issue of Rs. 143.97crores
of the high denomination notes, notes of the value of Rs. 134.9 crores were EXCHANGED.
Thus, notes worth only Rs. 9.07 crores were probably ‘demonetised', not having
been presented. It was more of “conversion“, at varying rates of
profits and losses than “demonetisation". 
The second demonetisation drive took place in January of 1978 under the Janta dal govt of Morarji Desai.
On 16 Jan 1978, the ordinance was announced via All India Radio at 9 AM. Banks and government treasuries were required to submit information (in the form of data ‘return’) to the Reserve Bank of India regarding high denomination notes held with them as at the close of business on 16 January 1978. The notes held would be exchanged for an equivalent value by the Bank. The general public was given three days to surrender high denomination notes for conversion. After 16 January, notes could be exchanged on tender of the high denomination notes in person by the individuals themselves or by a person competent to act on his/her behalf. They had to tender the notes at the Reserve Bank or at notified banks in the prescribed format with full particulars giving, among other things, the source or sources from which the notes came into his/her possession and the reasons for keeping the amount in cash.
This was a totally futile excercise. This time currency actually rose! Leave conversion or demonetisation, this was cumulation. Around 73.1 crore was the demonetised amount (Rs 1000 + 5000 + 10000) in 1977-78. Compared to this, 1067 crores were added by Rs 100 alone and the rest of the smaller denoms made up another 650 crores. So, it did not destroy any money stock at all. In 1946, atleast some bit was destroyed. The amount of denoms were also much smaller than seen in 1946. There were rumours also that demonetisation would take place, hence cash hoarders were well prepared.
Now comes the third demonetisation act, by the Modi government. After 38 years someone was again trying a failed method of driving out black money. The demonetisation this time was a bit different than earlier as, one it was a sudden surprise move by the govt and secondly it had given more time for exchange initially.
The big announcement came and naturally banks were not equipped to handle such a huge rush. Long serpentine lines could be seen and people faced a lot of hardships.Voices started raising against the govt's move and yet again the shrude govt linked demonetisation to nationality and patriotism. When it is a perceived matter of patriotism, none of the Indians have any complaint. They were all happy such a bold step is being taken place. In que it was a common conversation "dikkat to ho rahi hai, par chalo shi hai desh ke hit mai hai"(" we are facing problem, but it is ok, its in the nation's interest"). In the long run, it is in the nations interest or not is debatable, but in the short term it is suicidal to say the least.
Business has been forced to shut down. Consumption is rock bottom, even the thrirving industries of retail and online commerce are facing the hardship owing to the withdrawal of the popular COD through which 80% sales take place. The daily wage workers of the unorganised are not getting their payment. Sales and purchases by traders are down and dusted. The mandis are having a deserted look. Adding on to the woes, the foreign exchange and value of rupee via-a-vis dollar is a record low at 68.855. Experts feel this may touch the figure of 70 in a few months owing to the added effect of demonetisation. Hence, in the short term there is no bright spot.
But as the govt and the "patriotic" people, we are highly optimistic of the long term effects of demonetisation. Yes, there are differences from the previous demonetisation and this one. The first is obviously the scale at which it is happening. About 85% value of the total currency is out of circulation. In previous drives it was merely 30-40%. Secondly it is perhaps the first time common Indian as well as rich is being impacted, as earlier transactions with 500, 1000, and 10000 was not so common among average Indians. Thirdly perhaps, it is the first time that actual demonetisation (decreased number of circulating cash) is taking place as there are abundant alternative methods available like net banking, mobile wallet, card payment to name a few. This luxury was not available earlier and only cash could replace cash. In this the govt should also be congratulated for taking certain steps to move towards plastic economy by abolishing various cess and tax on card payments for the time being so that more and more people use it. Fourthly, it is for the first time that RBI is in favour of demonetisation, on the previous two occasions RBI was against it in principle. Moreover, India is a stronger and stable economy than the 70's or 40's and can tolerate such an impact better.
Having said all this, all the three moves have been primarily aimed at curbing black money and fake currency. But going by the earlier experience it is highly unlikely that black money will be out. According to experts only 10-20% of black money is in form of cash, rest are hoarded as gold, property and in the SWISS bank accounts of high profile people. Recently, news also broke out of fake Rs 2000 notes, so that aspect of the demonetisation is also under threat.
Nevertheless, it is a good move to begin with. But its futile, if not followed with other measures to weed out black money, fake currency and stop money laundering. The new Benami transaction act is a good followup along with incentivising card payment. Hope the government follows up with stronger and sterner steps and do justice to the sacrifice of the "patriotic Indian".
HARSHIT HAREENDRA
STUDENT
PIMS JALANDHAR
Just 6% of the so called black money is in the form of cash and even that has been converted to gold... Or other assets.... It is expected that 40 to 50 thousand crores cash may not be returned to the bank but that cannot be termed black money as most of the poor people without bank account and accessibility to banks might have contributed to that... In India we have 0.01 bank per lakh population so even this rhetoric of cashless economy is just to divert attention to the colossal failure of the government. The expenditure of replacing currency is 1.5 lakh crore and the total approx loss in economy is roughly put at 3.5 lakh crore.... Therefore this demonetisation was a stupid.. Brainless exercise to fool the people of this country!!!
ReplyDeleteNice to read your write up Harshit!!... Keep it up!!!
Thankyou!! Just wrote about what i could gather about the issue !!!
ReplyDeleteN ya the govt is hard selling the idea by relating it to patriotism.... N indeed pun was meant wen i said "patriotic indians"
N thnxx chachu for the fact check n putting light on the real issue :)
Awesome work harshit... Evident from the post how much hardwork u have put in.... Mind blowing collection of data..it's really a historical decision taken by PM...dont really knw about the long run consequences but in short tym disastrous results are coming due to poor execution of the action.. Moreover small scale industries nd agriculture sector are badly affected by it.. Hopefully it proves to be a gud decision in long run... .
ReplyDeleteThankyou Harman!! Different versions of the outcome are coming but one thing is clear all the economist have unanimously said that the new growth rate will be 3-4% lesser than the previous probection. It in itself is an indicator of where things are going.. But lets see what happens when this move is combined with the GST as the govt argues. We as common people cant do much about it apart from expressing our views.
DeleteWhen earlier 10,000 rupees note was declared illegal tender,the amount of those demonetised notes were only 0.1% and not 30-40%.Btw well written
ReplyDeleteYes u r right in 1977-78 0.1% ws 10000,55% 1000 notes n 18% 5000 notes in circulation.
DeleteI arrived at 30-40% as it gives combined figure of the two demonetisation that happened in 46 n 78... Not only of 10000. It included 500 n 1000 as well of both the occasions..
Lets not get into statistics thing but the principle behind the post that is impacting our lives these days
N thanks :)