Demonitization – A Failure

At the strike of midnight, on 9th November 2016, India witnessed a nation wide conundrum. The reason for this being the loss of  86% of its monetary base. Demonetization as they call it now, is a decision that the prime minister took with a radical and an almost unrealistic resolve to eliminate corruption,  black money, and terrorism, the basis on which the country has thrived for more than a few decades.

To put in a compact nutshell, the Prime Minister’s aim to end the emergence of the parallel economy, counterfeit currency and terror financing did not really go as planned. For instance we find that most of the black money is secured in the guise of land, buildings, gold, or is kept abroad. The black money in cash constitutes only 4% of the total amount of black money in the economy. Out of this miniscule amount, a lot of money is in circulation in everyday transactions.

The ones that have been severely affected by this move are the small farmers, merchants, daily wage laborers and small -scale traders because of their lack of planning and financial illiteracy. Most of these people do not possess bank accounts too, which increased viscosity of the scenario.

Demonetization is an established practice in monetary policy to tackle black money. The Prime Minister has explained why this is a financial surgical strike. It was meant to be implemented, unexpectedly. In the past, demonetization has taken place twice but it fails because the idea is to tackle the black money existing in circulation.

The further introduction of high-denomination notes, (2000 rupee notes) have only been speculated to increase the possession of Black money. The Prime Minister’s objective to move into a cashless society has not been taken well by the peasantry that constitutes a significant portion of the population.

Looking at other developed countries that still use cash transactions widely does not help the Indian understand the positive aspects of this motive.