With IMF trimming India’s growth rate from 7.6% to 6.6%, has the demonetization movement really costed India’s economic outlook?


By Baani Gambhir, a first year sudent from India studying International Relations at King’s College London.

Withdraw 86 percent of the country’s currency in one full-swoop, add a pinch of rhetoric, mix with an economic and moral reasoning like ‘flushing out the black market’ and wrap it up with nationalism- and your recipe for disaster is ready to cause unprecedented damage to the world’s largest and fastest growing economy. Still want more? Keep on high flame for about two months or more, and you have the growth rate cut down by a full percent.

A little over two months has passed since the Narendra Modi government’s ensnare on its own currency. Not only has this manoeuvre costed India’s economic outlook but apparently has resulted in the death of one hundred people.[1]This brings to focus a pressing question, if mass misery is great, why haven’t protests broken out?

The answer lies here: the debate over demonetisation, instead of being about logic or evidence, is framed as a challenge between two beliefs: If you are pro-demonetisation, you are patriotic; and if you are against it, you are not only ‘anti-national’ or ‘Pakistani’ but also corrupt and support criminal activity. By turning criticism of demonetisation into an unpatriotic and corrupt act, Prime Minister Narendra Modi has destabilised the ability of political parties and NGOs to organise protest. [2]

Indian Nobel laureate and Bharat Ratna awardee, Amartya Sen said “decisions like these get taken in China based on the vision of a small group of people, while in a democracy like ours, things move only when there is a public demand for it.” [3]

“Our political decisions, however, in contrast have to involve the public,” he said, comparing our situation with China and going on to mention the demonetisation exercise as an aberration from such a convention. Furthermore, he termed note ban as an unguided “missile” fired “unilaterally” by the government without adhering to the democratic conventions. “…every now and then we get missiles fired by the government unilaterally. Demonetisation one fine morning is of course just such a missile where there are reports coming in of hardships and suffering though it is not quite clear where the missile has landed,” Sen said. [4]

Two leading macroeconomists: Harvard’s Kenneth Rogoff and Lawrence Summers have also spoken about India’s recent demonetisation. Both are well-known for their opinion that in the US and Europe, high-denomination notes mainly aid tax evasion and crime, are of little usage in normal transactions, and should be banned.[5] Though Rogoff does not out rightly disregard the long-term benefits of India’s demonetisation, he is surprised by the introduction of a Rs. 2,000 note, even as a Rs 1,000 note is being scrapped on grounds that it encourages illegal cash hoarding. He adds that an overnight outlawing, as opposed to a phased decommissioning, entails too much “collateral damage” [6]

“Basically agreeing, Summers adds to this reasoning a basic utilitarian principle that it is better to let a few criminals go free than hurt so many innocent people — 93 per cent of India’s labour force, after all, is in the informal economy. Additionally, Summers thinks the costs of such a policy exceed the likely benefits.” [7]

Simply put, the ‘Modi demonetisation scheme’ does not follow the established logic of a currency ‘stabilisation’ measure; the Indian economy is hardly suffering any hyperinflation to even remotely authorise such a move. Demonetisation would haphazardly lead to extraordinary monetary tightening, with nearly Rs 15 lakh crore worth of currency being withdrawn overnight from circulation. This untimely, and probably unintended, ‘stabilisation’ has the potential to create a full-blown recession.

For the purpose of attaining public approval, this move, has instead, been projected as a ‘structural reform’, directed at restructuring public approach towards currency with a vision to move towards a cashless economy. However, in a country with less than 75-80 per cent literate, with another 25-30 per cent barely literate, with poor connectivity and ambiguous laws about privacy, the idea of a cashless economy might turn out to be an outrageous fantasy. Like Modi, Rogoff also favours cashless exchanges, but for him, it is viable only in a rich economy, where most economic exchanges are in the formal sector. It can trigger an economic blow in an overwhelmingly informal economy, like India.

The Modi government has said that the withdrawn Rs 500 and Rs 1,000 denomination notes will be replaced with new currency with enhanced security features.” But that’s easier said than done. To start with, printing itself — the total demonetised banknotes numbered 2-300 crore pieces — may take 5-6 months, according to various estimates. Even after printing, the new currency has to be delivered to bank branches and ATMs not just in Delhi and Mumbai. [8]

Dubbing the government’s claim that demonetisation would weed out black money and corruption as “hoax”, former Union Finance Minister P. Chidambaram has also criticised the Centre for not knowing the printing capacity to churn out new currency notes to cater to the demands of the people.

As it turns out, not only was the Reserve Bank of India (RBI) not ready with an appropriate amount of substitute currency, it will take substantial amount of time to do that. To deal with the short-run liquidity crisis, it rationed note distribution from banks, which will continue, though with a higher daily ceiling. The RBI has also tossed and turned, sometimes within a day, which makes a mockery of the economic principle that short-run monetary consistency is essential for financial trust. This creates serious doubts about the political autonomy and independent functioning of the RBI and raises serious doubts such as: Has the RBI become an arm of the political executive?

In the final analysis, demonetisation has caused serious economic distress in India, raised reservations about the wisdom of the government’s decision in achieving its said objectives vis-à-vis the costs to the people and abridgement of their rights and has costed India its economic outlook, due to a sharp decrease in trade.



[1] Worstall, Tim. “India’s Demonetisation Kills 100 People Apparently – This Is Not an Important Number.” Forbes(Forbes), December 8, 2016. http://www.forbes.com/sites/timworstall/2016/12/08/indias-demonetisation-kills-100-people-apparently-this-is-not-an-important-number/#c0fc47411a7c.

[2] Varshney, Ashutosh. “The Indian Express.” January 5, 2017. Accessed January 29, 2017. http://indianexpress.com/article/opinion/columns/post-truth-demonetisation-donald-trump-cash-crunch-narendra-modi-4456232/.

[3] “The Indian Express.” January 28, 2017. Accessed January 29, 2017. http://indianexpress.com/article/india/amartya-sen-on-demonetisation-note-ban-an-undemocratic-move-akin-to-unguided-missile-4495942/.

[4] Varghese, Roy. “Amartya Sen Urges Healthcare for All.” January 29, 2017. Accessed January 29, 2017. http://businessworld.in/article/Amartya-Sen-Urges-Healthcare-For-All-/29-01-2017-112092/.

[5] “The Indian Express,” “Post-Truth demonetisation,” January 5, 2017, accessed January 29, 2017, http://indianexpress.com/article/opinion/columns/post-truth-demonetisation-donald-trump-cash-crunch-narendra-modi-4456232/.

[6] “India’s cash bonfire is too much too soon” in “Financial Times”, December 9, 2016, accessed: January 15, 2017, available at: https://www.ft.com/content/59c3e922-bd72-11e6-8b45-b8b81dd5d080.

[7] “India’s cash bonfire is too much too soon” in “Financial Times”, December 9, 2016, accessed: January 15, 2017, available at: https://www.ft.com/content/59c3e922-bd72-11e6-8b45-b8b81dd5d080

[8] “Why Narendra Modi’s demonetisation move is unprecedented” in “The Indian Express,” January 21, 2017, accessed January 29, 2017, http://indianexpress.com/article/opinion/columns/narendra-modi-demonetisation-digital-cashless-economy-4484306/.















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