Edited by Bola Babarinde
What happened after India eliminated cash
In 2016, India’s two highest-denomination currency notes (Rs 1,000 and Rs 500) were suddenly withdrawn from the market. The demonetization process was planned in secrecy and announced dramatically, as a masterstroke against black money.
The withdrawn notes, amounting to US$320 billion at the time, represented 86 percent of the total currency value in circulation in India. By making the notes worthless almost overnight, the government hoped to destroy large piles of black money hidden away by tax evaders and strike a major blow against corruption and counterfeiting
Two years after demonetization, India’s black money problem did not go away. The economy took a beating, huge financial losses were incurred, and the marginalized poor, least able to withstand adversity, were negatively affected.
Clearly, assumptions proved to be far from reality. Apparently, Indians did not stash away bundles of cash, but held their money in real estate, gold, and foreign currencies. Whatever was held in cash found its way back into the banking system easily. The wealthy sold their currency at discounted rates to money-laundering intermediaries, who then deposited the notes into the banking system through the accounts of low-income Indians.
The cost of printing new notes and managing the demonetization exercise put a sizeable dent in the central bank’s coffers, reducing its annual dividend to 46 percent of what it paid the government the previous year. There was very little counterfeit currency detected among the notes returned.
Demand for goods and services fell immediately after demonetization. Segments that relied on cash transactions — such as agriculture, organized and unorganized retail, and the micro, small, and medium enterprise (MSME) sector — suffered most.
In a largely informal economy where the most vulnerable people still have no access to digital payments, demonetization was an ill-considered, draconian measure that did a lot of damage to the Indian economy. At the end of two years, the benefits did not seem to have been worth the enormous financial losses and suffering.
Culled from strategy-business
