Failed goals: Six years after demonetization, cash still holds sway, black money is prevalent & fake notes are on the rise

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• Nov 8, 2022 | Dhupali Das

The announcement at 8:00 pm, aimed at flushing out black money (funds hidden from the taxman), resulted in...

Digital Desk: On November 8, 2016, Prime Minister Narendra Modi made an appearance on national television and declared that all Rs 500 and Rs 1,000 banknotes would become invalid at the stroke of midnight. The announcement at 8:00 pm, aimed at flushing out black money (funds hidden from the taxman), resulted in approximately 86 percent of the currency in circulation becoming invalid four hours later.

Some analysts were shocked by Modi's decision, claiming that only approximately 5% of back money is kept in the form of currency. They claimed that the remaining is in the form of other assets, such as real estate and gold.

In October of this year, a five-judge bench hearing a slew of petitions regarding the judgment stated that it would have to investigate the 2016 move.

Demonetization was justified by three economic goals: eliminating black money, eliminating counterfeit currency notes, and creating a cashless economy by encouraging digital transactions. The biggest of these was dealing with black money. Black money is defined as a currency that is either unaccounted for in the banking system or on which no state tax has been paid.

Has India met any of the stated goals six years after the demonetization? Let's look at the available data.

Black money hunt: a failure

Did demonetization succeed in its goal of putting an end to the black money economy? Data from the Reserve Bank of India (RBI) shows that more than 99 percent of the money that was invalidated was pumped back into the banking system. Of the notes worth Rs 15.41 lakh crore that were invalidated, notes worth Rs 15.31 lakh crore returned.

How much black money has been recovered since the note-ban exercise? This is difficult to assess as there are no new estimates of how much black money has been recovered since demonetization.

However, in February 2019, then-finance minister Piyush Goyal told Parliament that Rs 1.3 lakh crore in black money had been recovered through various anti-black money measures, including demonetization.

Former RBI governor Raghuram Rajan revealed in his book 'I do what I do' that he never supported the idea of a note ban and believed that the short-term effects of the action might outweigh the long-term benefits.

Remember that the government had initially projected that the effects of demonetization would be sufficient to eliminate at least Rs 3-4 lakh crore in black money from outside the banking system. Data so indicate that demonetization was unsuccessful in locating hidden money in the system. Meanwhile, cases of black money seizures continue.

The Income-tax department reported in August of this year that it had raided several business organizations that operate hospitals in Haryana and the Delhi-NCR region and found black revenue totaling more than Rs 150 crore. Similarly, during searches against two business groups involved in silk saree trade and chit fund in Tamil Nadu, the department found an undeclared income of more than Rs 250 crore. Several such incidents have occurred throughout the country.

An increase in fake notes

A second goal of the experiment, dealing with fake money, also appears to have failed. According to the Reserve Bank of India (RBI), counterfeit Indian currency notes climbed by 10.7% in the fiscal year that ended in March. Fake notes of Rs. 500 climbed by 101.93 percent, while those of Rs. 2,000 increased by more than 54 percent, according to the central bank.

According to the RBI data, counterfeit notes of Rs 10 and Rs 20 increased by 16.45 and 16.48 percent, respectively, in FY22. Fake Rs. 200 notes increased by 11.7%. The data showed that counterfeit notes in values of Rs 50 and Rs 100 fell by 28.65 and 16.71 percent, respectively. 6.9% of those were discovered by the RBI, and the remaining 93.1% were discovered by other banks.

6.32 lakh counterfeit pieces were seized across the country in 2016, the year demonetization was imposed. According to RBI data, a total of 18.87 lakh fake notes in various denominations were confiscated in the next four years across the nation.

The most fake currency notes confiscated in the post-demonetization years were in the Rs 100 denomination—1.7 lakh pieces in 2019–20, 2.2 lakh in 2018–19, and 2.4 lakh in 2017–18. According to RBI data, there was a 144.6 percent increase in fake Rs 10 notes, a 28.7 percent increase in false Rs 50 notes, a 151.2 percent increase in fake Rs 200 notes, and a 37.5 percent increase in fake Rs 500 [Mahatma Gandhi New Series] notes.

Cash is king

Later, the creation of a cashless economy was presented as another main goal of demonetization. How has this progressed? Cash has proven to be king in the post-note-ban years. According to RBI data, the amount of money in circulation rose from Rs17.7 lakh crore on November 4, 2016, to Rs 30.88 lakh crore on October 21, 2022.

At Rs 30.88 lakh crore, currency with the public is 71.84 percent higher than the level for the fortnight that ended November 4, 2016. 

Digital payments have risen

Undoubtedly, the number of digital payments has increased. According to RBI data, transactions through the Unified Payments Interface (UPI) reached a record high of Rs 12.11 lakh crore in October, six months after passing the Rs 10 lakh crore mark in May. UPI reached a record number of transactions in October at 730 crores. In September, UPI transactions surpassed Rs 11 lakh crore in volume.

Approximately 71 billion digital payments were made in India during the fiscal year 2022. Compared to the preceding three years, this was a huge increase. UPI has seen significant growth since 2015, both in terms of numbers and value.

So, what is the main point here?

The main declared goals of demonetization—eliminating black money, combating counterfeit currency, and establishing a cashless economy—are yet to be achieved. Even though there is an increase in digital transactions, which are primarily motivated by convenience and the rise in online transactions which were in turn prompted by the COVID-19 outbreak and accompanying lockdowns, people still prefer to deal in cash to a great extent. This could imply that digital channels would have grown even without the hugely disruptive economic shift.

The note ban's prudence in the Indian economic environment is still a hot topic of discussion. While there has been a noticeable increase in digital payments, it is questionable if the elaborate operation to find black money—the stated and major goal of demonetization—was worthwhile.