SUPPOSE that one day the government of a large and fast-growing economy became convinced

that its highest priority was to purge the country of black-economy millionaires hoarding piles of
illicit cash. Seeking popular approval, it sent the printing presses into overdrive, hoping to inflate
away the value of these secret piles of wealth. It worked: rising prices struck a blow against the
undeserving rich, and by egging on others to deposit their money in banks (where it could at least
earn interest), the shadow economy shrank. The government could plough the newly created
money into tax breaks and public-works schemes.

Critics, rightly, would stand aghast. Inflation would affect everyone who held cash, law-abiding
or not. Much of the wealth of those enriched by the black economy would be insulated, because
lots of their lucre is held not in cash but in property, gold or jewellery. Such heavy-handed
measures could undermine the credibility of important government institutions. Fear that they
might be used again in future could weaken confidence in the currency as a store of value—
paving the way for some broader institutional failure, like hyperinflation. Long-run trust in the
judgment of the state might be threatened.

On November 8th India’s prime minister, Narendra Modi, announced a course of action just as
radical as that described above, if the converse of it. He declared that all 500- and 1,000-rupee
notes—making up 86% of the cash in circulation in India—could no longer be used in shops.
More financially mature economies than India would struggle to cope with such a scheme, but
this one floundered at once. Though Indians have until the end of the year to swap their defunct
bills, the roll-out of new ones has been bungled. A broad cash crunch and broken supply chains
threaten a sharp economic slowdown—albeit one that will abate, at least in part, as the cash
squeeze is alleviated. India’s “demonetisation” is a cautionary tale of the reckless misuse of one
of the most potent of policy tools: control over an economy’s money.

Unlike most currency reforms, designed to boost confidence in the currency, Mr Modi’s
motivation is different. The primary aim of demonetisation is reasonable enough: the
government hopes to improve the functioning of the economy and boost its tax take by cracking
down on the shadow economy. The vast majority of transactions in India take place in cash;
many escape book-keepers’ notice. Economists reckon that India’s black economy accounts for
at least 20% of GDP. Such off-the-books activity shields fortunes from taxation and allows
corruption to flourish. Past efforts to attract black money into the light—using tax amnesties, for
example—have had little effect.

Demonetisation forces the issue. Indians can swap their hoards of useless bills for useful ones,
but those that cannot present paperwork accounting for their cash piles will receive unwanted
attention, and tax bills, from the government. Demonetisation also increases use of electronic and
bank-based payment systems, which will make record-keeping easier and more common,
allowing government better to track and tax the proceeds.

Yet the government also reckons it can profit from bills that are not turned in. In economic
textbooks, money is considered a liability of the central bank—a debt. In most modern
economies that debt sits on its balance-sheet, and is offset, on the asset side, by holdings of
securities like government bonds. The old and unreturned notes, if they are recognised as
cancelled liabilities, would therefore create a huge positive asset position on the central bank’s
balance-sheet. The Reserve Bank of India could, if it chose, create new currency liabilities (that
is, print money) and transfer that money to the government to spend. Some economists hope the
money will be recycled back into the economy through a fiscal stimulus, which might help
soothe some of the pain caused by demonetisation.

The status of this would-be windfall is uncertain. If the government allows Indians to redeem
dead notes for live ones indefinitely, it is not clear when or if the RBI might recognise cancelled
liabilities on its balance-sheet. So far, Indians are depositing their money in the banking system
with impressive haste. Of the 14trn rupees ($207bn) invalidated by demonetisation, an estimated
8.5trn has already been deposited. Still, as much as 3trn rupees could remain in the wild as a
potential government windfall, reckons a recent analysis by Credit Suisse, a bank.

The other rupee drops

However clever the plan looked on paper, it is both extraordinarily blunt and risky.
Demonetisation will probably make only limited strides in shrinking the black economy while
affecting all of India’s 1.3bn citizens, the poorest most of all.

In much of the Indian economy, and especially outside big cities, where cash transactions are
most common and financial infrastructure least developed, the sudden invalidation of a vast
amount of outstanding currency represents a significant monetary shock. Not all of India’s
shadow economy—which provides real employment and income, if not real tax revenues—can
migrate quickly and easily above board. Whatever cannot easily be shifted represents a potential
loss of economic activity, and a drag on broader Indian economic growth. Similarly, if a cash
crunch forces small firms without access to credit to shut down, the eventual alleviation of the
cash shortage might not lead to an immediate and complete revival of economic activity.

Managing an economy’s money is among the most important tasks of the government. Clumsy
use of monetary instruments comes with high risk. John Maynard Keynes, an economist, was
echoing Lenin when he wrote in 1919: “There is no subtler, no surer means of overturning the
existing basis of society than to debauch the currency.” Trust is fragile, and precious.

This article appeared in the Finance and economics section of the print edition under the
headline"Paper pains"

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Reuse this content

"The dire consequences of India's demonetisation initiative". The Economist. 3 Dec 2016. Retrieved 2017-01-
05.
2 "Hawala dealers in Kerala hit hard by demonetisation
"How Demonetisation Has Affected India's Agricultural And Food Markets".Huffington Post India.
Retrieved 2016-11-24.

India's ₹17 lakh-crore agricultural and food markets, from the mandi to
the neighbourhood grocer, are at a standstill. Demonetisation has
vacuumed liquidity from this virtually cash-only economy that provides
livelihood to half the population. Prices have crashed and fresh
produce lies rotting. The situation indeed appears dire.
Business is forecast to revive only after people in 7,500-
plus mandis and 600,000 villages are re-stocked with new currency.
Yet, those with the courage to look beyond this doomsday scenario
can spot the proverbial rainbow

It is a myth that farmers refuse to accept

cheque payment

Take farmers first. It is a myth that farmers refuse to accept cheque

payment. Small dairy farmers in Andhra Pradesh accept cheques.
Sugarcane farmers accept cheques from sugar factories. Moong
farmers are accepting cheques from government procurement
agencies. Apple farmers accept cheques from large buyers. Potato
contract farmers accept cheques from food companies. Maize farmers
in Nabrangpur, Odisha's poorest district, and coconut farmers in
Karnataka took cheques from state agencies. The list is growing.

In Karnataka and Andhra Pradesh, which have adopted the Rashtriya

eMarketServices-runUnified Markets Platform, produce worth ₹39,000
crore has been sold with cheque payment in the last four years. The
250 mandis in 10 states that have adopted the electronicNational
Agricultural Market (eNAM) platform for sale of primary produce are
designed for cheque payment. So far, 1.60 lakh farmers, 46,000
traders and 26,000 commission agents have been registered on the e-
NAM platform.
Food Corporation of India tried but failed to pay Punjab and Haryana farmers by cheque
for wheat, only because the powerful commission agents want to first deduct the loan
repayment amounts.

Direct benefit transfer for seeds has been a success even among the
small and marginal farmers of Uttar Pradesh. Moreover, of the seven
crore Kisan Credit Cards issued in India, more than one crore are
ATM-enabled debit cards. Farmers accept insurance and disaster
relief cheques. So to portray the farmer as a Luddite is both unfair and
untrue.

What's more, marketing practices are changing in several crops,

especially oilseeds, maize and certain spices. Farmers now have the
option to store their produce in modern warehouses for a market-
driven rent and take a bank loan against them. So even if
themandis stay shut until the cash shortage recedes, the farmer can
still borrow against his commodity.

Farmers now have the option to store their

produce in modern warehouses for a
market-driven rent and take a bank loan
against them
It is true that the small and marginal farmers who sell off their produce
in the village itself are hurt by the demonetisation. Similarly, value
chains with minimal processing and direct consumer sales such as
fruits and vegetables are hit. Most fresh produce is sold by small
hawkers and vegetable mongers in the streets of India. Since they
take payment in cash and buy their wares from the mandi in cash,
business is down. These are symptoms of the crying need for reform.
The millers and processors who have raw material in their godown to
last two-three weeks are in no panic. In any case, business in
the mandis has to pick up within a month. Food is not a discretionary
expenditure. The pent-up retail consumer demand will eventually pull
up prices sufficiently high to lure traders and re-start the market
engines.
Visible difference will come if the government uses demonetisation to
persuade two intermediaries in the value chain — the trader and the
village shopkeeper — to adopt electronic payments. All the APMC
markets are regulated by state governments and used by the larger
traders. They should be made cash-free.

The high incidence of indirect taxes have made it lucrative for

wholesalers and distributors to stay below the radar and offer the
savings as discount to consumers in a low-margin and highly
competitive commodity market. Tax avoidance has become their
formula for survival. A solution can be found through GST.

Visible difference will come if the

government uses demonetisation to
persuade two intermediaries in the value
chain — the trader and the village
shopkeeper — to adopt electronic
payments
To convince agri-input and other merchants, the government should
make it easier and cheaper for them to adopt card payment and
mobile wallets on a trial basis. Shopkeepers should be educated
about how they can expand business by moving from "cash only" to
"cash and card" because it attracts more customers. Those customers
also spend more because they are not hampered by lack of cash.
Once village retailers accept digital payments, rural customers will
follow. Exactly the way mobile wallets picked up with Ola and Uber.
Economists call it the network effect.

It doesn't end there. Good customer experience is the key to adoption.

The biggest argument in favour of cash is its convenience. You don't
need literacy or tech savvy to use cash. Or travel miles to use an
ATM. So the push for adoption of digital payments has to begin with
easy documentation, quick and hassle-free KYC norms to incentivise
utilisation of financial services in rural areas. Usage charges should be
low and competitive so that farmers don't find them prohibitively
expensive.

Electronic payment points should be available at walking distance.

Users should find apps easy to use and in their local language. They
should quickly receive delivery, be assured of complete back-end
security and have plenty of choice. The entry of payment banks will
hopefully ease some of these pain points.

Once the agricultural value chain adopts electronic payments and

cleans up its books to align itself with the financial supply chain,
benefits will follow. The biggest will be the inflow of private and
banking capital, which is waiting to power agricultural growth, and
social impact capital to improve rural lives.

Cash is an inefficient medium of exchange. The World Bank estimates

that the Indian government can save 1% of the GDP annually from
digitising current cash-based subsidies alone. Farmers, traders,
processors and retailers will never again blindly trust cash. That
makes it the perfect opportunity to prise open closed minds and
 introduce new payment habits in this otherwise opaque part of the
economy.

"Demonetization: Key developments". NewsBytes. Retrieved 2017-01-30

"Demonetisation a revolutionary step to fight corruption: Anna Hazare". 10 November 2016.

How Will Demonetization Affect

Business in India in 2017?
Jan 05, 2017

 Asia-Pacific

 India

It’s work in progress. Three events dominated India’s economic landscape last year, but whether
they can be described as “progress” is debatable. One definitely isn’t: the unseemly brawl that
broke out over control of the Tata group with Ratan Tata returning as interim chairman after
ousting incumbent Cyrus Mistry. A lot of dirty linen is being washed in public, putting partly in
the shade the political charges being traded elsewhere.

The second is the goods and services tax (GST), whose objective is to replace all taxes levied by
the federal government and the states with one central tax. The GST is scheduled to come into
effect by April or — at the latest — by September. Although both houses of Parliament have
approved the bill and the President has signed off on it, a GST Council is now squabbling over
the details, which could delay implementation.

“The timing is not right for implementation,” says West Bengal finance minister Amit Mitra,
who is also chairman of the empowered committee of state finance ministers. He lays the blame
squarely on the center’s move to demonetize Rs500 ($7.4) and Rs1,000 notes. “We all supported
the GST under the premise that this would be the only destabilization factor,” Mitra told a TV
channel. “We did not know that there would be a much bigger destabilization in the form of
demonetization that would be let loose on the country.”

According to Wharton emeritus professor of management Jitendra Singh, while it is too early
toassess the impact of demonetization, the move raises long-term questions. “What will have
been gained from this step, and at what cost and mostly borne by whom?” he asks. He notes that
rival political parties that have protested against demonetization could “broaden their tactical
agenda to harm or even derail the GST implementation.” It also remains to be seen how the
negative sentiment against demonetization could hurt the BJP and its allies in assembly elections
in Uttar Pradesh in February-March, he adds.

“What will have been gained from

[demonetization], and at what cost, and mostly
borne by whom?”–Jitendra Singh
Demonetization represents much more than destabilization; critics argue that it has struck a body
blow on economic activity in India. The decision – which was entirely unsuspected – was
announced on 8 November 2016. While the pros and cons of the measure still continue to be
debated, the consensus of opinion appears to be that while the proponents of demonetization may
 have had good intentions, the suffering it has caused to millions of Indians is unwarranted. Since
Rs500 and Rs1000 notes make up some 86% of the total currency in circulation in India,
especially in the vast rural areas, one economist compared the pain to what individuals might
experience if 86% of their blood was removed from their bodies.

To be sure, demonetization has its supporters. While industrialists and corporate chiefs (Ratan
Tata, Mukesh Ambani, K.V. Kamath and Deepak Parekh, to mention a few) favor the move,
economists (including Nobel laureates Amaryta Sen and Paul Krugman, among others) are
critical. “The clan of economists has spoiled the party [with] their estimates of how output will
be affected as spending has stopped, manufacturing hit and several workers laid off. The net
result can be a fall of between 0.5% and 2% in GDP,” says online news channel Firstpost. “The
debate still goes on.”

According to Singh, Modi took “a bold, even visionary, step” with demonetization in attempting
to combat the black economy and counterfeiting, and cutting financial support to terrorism.
“What was always key, however, was how well the implementation process would unfold,” he
notes. “Even supporters of the decision would say that the implementation was far from perfect.”

Kartik Hosanagar, a professor in Wharton’s department of operations, information and decisions,

views demonetization against the backdrop of other economic gains. The year 2016 has overall
been “a good year” for India, he notes, listing the highlights:

 The GDP growth rate has held up at more than 7%.

 Foreign direct investment went up significantly during the year. (It rose 30% on a year-on-year
basis to $21.6 billion between April and September 2016, according to public data published by
the India Brand Equity Foundation, a government-sponsored trust.)

 Initiatives such as the ‘Make in India’ program “have borne early fruits.” Many MNCs
including Panasonic and Pepsi set up manufacturing facilities in India during the year.

 “The startup world has seen a drop in investment activity, but I see that as a return to sanity
rather than a worrisome contraction,” Hosanagar adds.

“The biggest wild card in all of this, of course, is demonetization,” notes Hosanagar. “It’s
unclear how it will all play out.” He hopes that “any impact on economic activity and GDP will
be temporary, and the long-term benefits such as an increase in cashless activity will be more
permanent.” He adds that “this is the India optimist in me speaking.”

“The biggest wild card in all of this, of course, is

demonetization.”–Kartik Hosanagar
Part of the problem with demonetization was that it came as a bolt from the blue; the government
claimed giving advance notice would have the defeated its purpose. But not everyone agrees
with that view. “There was no need for secrecy,” counters Jayati Ghosh, a professor of social
sciences at Jawaharlal Nehru University. “All demonetizations through history have been done
with some advance warning. This reduces the damage to innocent people. The government could
monitor suspicious transactions after the announcement, just as it is doing now. In any case, I
would not have demonetized Rs500 notes. If high-value notes like Rs1,000 are the problem, why
replace them with even higher value notes?” (A Rs2,000 note has been introduced as part of the
package.)

Moving Goalposts
The government, meanwhile, seems to have moved the goalposts: The claimed objective of the
exercise has apparently changed from rooting out black money to promoting cashless
transactions. Several measures have been introduced, among them a 0.75% discount on digital
payments made for buying petrol and diesel and a 0.5% cut in the price of railway season tickets
bought using digital technology.

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In another twist, the government appears to be no longer pushing demonetization as a “cashless”

plan. It has now become a “less-cash” strategy. That is as it should be; the world doesn’t have a
cashless economy so far. In India, Bloomberg data shows the share of cash in the volume of
consumer transactions is 98% (against 55% in the U.S. and 48% in the U.K.). It is 90% in China
and 86% in Japan. Much of the cash transactions are in rural India. So, expectedly, life came to a
near standstill and much misery ensued when people found themselves unable to use their own
money. Even when the money was in a bank account, limits on ATM withdrawals compounded
the problem further.
But India is also a country where finding novel, workable solutions to problems – commonly
known as jugaad — is par for the course. While long lines multiplied in front of banks and
ATMs (several people claimed to have had heart attacks while standing in them), ways were
found to deal with the situation. By December 31, the visible impact was a Parliament at near
paralysis as politicians took potshots at each other, a plethora of banking riches coming back into
the system (some 90% of the Rs500 and Rs1,000 notes were returned), and a host of new scams
to convert black money into white with the connivance of bankers and politicians.

Nobody is denying a short-term setback. The Reserve Bank of India (RBI) has reduced the GDP
growth rate forecast for 2016-17 from 7.6% to 7.1%, the Asian Development Bank from 7.4% to
7%, Fitch from 7.4% to 6.9% and Bank of America-Merrill Lynch from 7.7% to 7.4% (for
calendar 2016). All believe, however, that growth will recover the next year.

Modinomics to the Defense

Modi defended the demonetization exercise in a televised speech on New Year’s Eve, arguing
that it had to be done. “It seemed at times that the evils and corruptions of society, knowingly or
unknowingly, intentionally or unintentionally, had become a part of our daily lives,” he said.
“Crores of Indians were looking for an escape from this suffocation.”

Modi said in his speech that after demonetization, only 24 lakh (2.4 million) Indians
acknowledge an annual income of Rs. 10 lakh each (Rs. 1 million). “Can we digest this? Look at
the big bungalows and big cars around you,” he said. “If we look at any big city, it would have
lakhs of people with annual income of more than [Rs.] 10 lakh. Do you not feel, that for the good
of the country, this movement for honesty needs to be further strengthened?” The upshot of that
is his government would now try to bring hundreds of thousands of tax evaders into the net.

But Modi will find it tough to strengthen the tax machinery sufficiently to force those people to
start paying taxes, according to critics. “If he doesn’t, then what was the point of subjecting the
whole country to so much disruption and pain?” writes Siddharth Varadarajan, former editor of
The Hindu newspaper, in The Wire, a nonprofit publication.

Modi also said in his speech that over the last 10-12 years, the demonetized currency was being
used in the black economy, and that excess cash in the system caused inflation to spike and
fueled corruption. “Lack of cash causes difficulty, but excess of cash is even more troublesome,”
he said. Critics have attacked those remarks as being unsound in economic theory.

Demonetization could have potentially derailed the GST, which was practically a done deal,
according to experts interviewed by Knowledge@Wharton. The impact of demonetization will
pass in a couple of quarters, but the GST delay will have more far-reaching effects.
“Undoubtedly, the GST is a bigger reform. It would be the most fundamental reform initiated
since 1991,” says Dharmakirti Joshi, chief economist at Crisil, a global S&P company.

“There was no need for secrecy. All

demonetizations through history have been done
with some advance warning.”–Jayati Ghosh
Commenting on demonetization, Joshi says: “Any disruption in the flow of money, verily the
economy’s lifeblood, impacts business cycles quickly. There is no precedent to the scale of
demonetization that has taken place in India. That is why quantifying its impact is so difficult. A
few countries that replaced their old currency with new did it in a gradual manner — the
introduction of the euro in the Eurozone, or in Zimbabwe where the old currency was gradually
phased out.”

The GST Impasse

The government has only itself to blame for the GST impasse. The proposal has been around for
a dozen years. Its origins lie even further in the past: In 2000, the BJP-led government of A.B.
Vajpayee started a discussion on the GST. Prime Minister Narendra Modi had opposed it when
he was chief minister of Gujarat; now, it is the pivot of his reforms. Experts agree that the GST
could increase India’s GDP by 1.5% to 2%. It has received, in its time, the backing of former
finance ministers Pranab Mukherjee (now president of the country) and P. Chidambaram. Yet it
still gets held up.

One reason is that implementing the GST requires a constitutional amendment. The GST
Constitutional Act has already been passed by the Lok Sabha and the Rajya Sabha (the two
houses of Parliament) and, on 8 September, the President of India signed off on it. The states – in
the form of the GST Council – are reading from the same book. But it may take some time to get
to the same page.

According to Singh, while the GST has the potential to boost GDP growth and foreign
investment flows, the opposition to it could cost the country dearly. “There is the very real
possibility that some actors will take the low road, and try to delay or even derail the GST
implementation,” he notes. “If that were to occur, it will not be the first time in post-1947 Indian
history when key leaders would snatch defeat from the jaws of victory.”

Singh hopes that the political parties involved, including state level parties, “put the collective
long-term interests of India and all Indians above apparently enticing short-term partisan gains,
and get the GST bill implemented at the earliest.”

Viewed in isolation, demonetization and GST could be promising for India, according to Singh.
“Absent some of these spillovers, the long-term impact of the demonetization could be quite
positive for the Indian economy,” he says. “If the GST gets implemented soon, and if there is
further rationalization of the tax structure, and if opposition parties cooperate, there may be a
couple of quarters of somewhat lower growth, and then the economy would return to its positive
trajectory. But there are several ‘ifs’ in between.”

Ta ta, Cyrus Mistry

The end of the year also saw a high-profile family split. The 149-year-old Tata group, the largest
in the country and the most respected, with a global turnover of more than $100 billion, sent
shockwaves through corporate India with the ouster of chairman Cyrus Mistry.

Mistry took charge four years ago after a search panel was appointed to find a replacement for
Ratan Tata, who was turning 75. The 50-year-old Mistry was a surprise choice. And problems
were apparently building for a long time under the surface.

“Any disruption in the flow of money, verily the

economy’s lifeblood, impacts business cycles
quickly. There is no precedent to the scale of
demonetization that has taken place in India.”–
Dharmakirti Joshi
Mistry is now being ousted from all the Tata group companies. Says a letter to shareholders by
Ratan Tata: “Since Mistry was appointed as a director of various Tata group companies only as a
corollary to his being the chairman of Tata Sons, the right step would have been for him to resign
as director. Unfortunately, he has not yet done so, and his continued presence as a director is a
serious disruptive influence on these company boards, which can make the company
dysfunctional, particularly given his open hostility towards the primary promoter, Tata Sons.”

Responded Mistry: “I have to say that the board of directors [of Tata Sons] has not covered itself
with glory. To ‘replace’ your chairman without so much as a word of explanation and without
affording him an opportunity of defending himself in a summary manner must be unique in the
annals of corporate history. The suddenness of the action and the lack of explanation have led to
all manner of speculation and has done my reputation and the reputation of the Tata group
immeasurable harm.”

Most of the Tata group is owned by the Tata trusts, of which Ratan Tata is chairman. So there
are no two ways about how the ouster move will go. But Mistry has his supporters. His family
has a stake of some 20% in Tata Sons; the trusts hold about 66%. Besides, he is not without
friends, who include some independent directors. Nusli Wadia, a board member of Tata Motors,
has entered the fray (with yet another letter). “[JRD Tata, Tata Group chairman before Ratan
Tata] never expected anyone to toe his or the Tata line,” he told the board of Tata Motors (where
he has been an independent director). “It is both sad and unfortunate that Tata Sons and its
interim chairman Ratan Tata are not only not practicing this great tradition but effectively
destroying it.” Wadia has sued Tata Sons for defamation.

Singh suggests that the problems at the Tata Group run beyond those related to Mistry’s ouster.
He describes the group as “a structurally complex entity, with multiple interests at play, all of
which may not always be naturally aligned.” As Mistry’s family owns a significant minority
shareholding in Tata Sons, “it is natural to think that interpersonal issues are paramount here,” he
noted. “This is a mistake. There are difficult structural issues embedded in the context, some of
which will not go away with Mistry’s departure as chairman of Tata Sons.”
 According to Singh, the Tata-Mistry controversy could have wider, deleterious effects if it is not
resolved soon. “At a minimum, it is a distraction from the effective governance and operations of
the group; it could damage the Tata brand; and it also has the potential to raise questions in the
international community about the attractiveness of India as an investment destination.”

As matters stand, Mistry has resigned from the boards of the major Tata companies (except for
Tata Sons). “The fight goes onto another platform,” he told the Business Standard newspaper
after he quit. “[I] will pursue it further. This move gives me an opportunity to concentrate my
efforts…. I will be moving legally.” Won’t the battle be long and arduous? “I have a lifetime
ahead of me,” he replied.

In a statement to the shareholders announcing his resignation, Mistry states: “Bringing to the fore
these ethical issues can have a short-term adverse impact… I feel strongly that such short-term
pain is necessary for long-term interests.”

Is that Cyrus Mistry talking or Narendra Modi?

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One Month In, What's The Impact Of

India's Demonetization Fiasco?
 


 A month into India’s demonetization initiative, long lines of people looking to
exchange notes still spew out of banks, some sectors of the economy
continue struggling with the lack of readily available cash, grassroots
businesses are still being revolutionized with electronic payment
capabilities, and masses of people continue transitioning towards new ways
of paying for basic goods and services.
 On Nov. 8, 86% of India’s currency was nullified in a great demonetization
effort that aimed to clean out the black market's cash supply and
counterfeit notes which completely disrupted the social, political, and
economic spheres of the world’s second largest emerging market. All 500 and
1,000 rupee notes were instantaneously voided, and a 50 day period
ensued where the population could (ideally) redeem their canceled cash for
newly designed 500 and 2,000 rupee notes or deposit them into bank
accounts.

 India has done this before. In 1946, all 1,000 and 10,000 rupee notes were
recalled. In 1978, 1,000, 5,000, and 10,000 rupee notes were demonetized.

 This recent bout of demonetization was planned in secret by a small, tight-

knit group led by Prime Minister Modi, and it overtook the country like a
flash flood. This surprise was by design, as it was feared that if the black
market caught wind of what the government was planning they would find
ways to rapidly unload their illicit cash, andthe initiative would flop on one of
its initially-stated goals.
 Of course, this meant that the rest of Indian society was also caught in
the demonetization crossfire. Not even the banks — who would be required
to do the heavy lifting on the ground — were in the loop. In the days
following Modi’s announcement, the banks didn’t have enough of the
newly designed banknotes on-hand to distribute in exchange for the
canceled notes, and there simply wasn’t an adequate supply of smaller
denominations in circulation to run the cash economy. Far from being a 50
day transition, it is estimated that even if India’s printing presses were to
 run 24/7 it would take upwards of four months to a year before the currency
supply was adequately restored.
 More articles about Modi demonetization initiative here and here.
 This recent bout of demonetization was planned in secret by a small, tight-
knit group led by Prime Minister Modi, and it overtook the country like a
flash flood. This surprise was by design, as it was feared that if the black
market caught wind of what the government was planning they would find
ways to rapidly unload their illicit cash, andthe initiative would flop on one of
its initially-stated goals.
 Of course, this meant that the rest of Indian society was also caught in
the demonetization crossfire. Not even the banks — who would be required
to do the heavy lifting on the ground — were in the loop. In the days
following Modi’s announcement, the banks didn’t have enough of the
newly designed banknotes on-hand to distribute in exchange for the
canceled notes, and there simply wasn’t an adequate supply of smaller
denominations in circulation to run the cash economy. Far from being a 50
day transition, it is estimated that even if India’s printing presses were to
run 24/7 it would take upwards of four months to a year before the currency
supply was adequately restored.
 More articles about Modi demonetization initiative here and here.
 “I personally think it's a chicken or egg situation because the more
prepared you are, the more people who are aware, the more opportunity
you're giving to people to find loopholes in the system,” said Arpan Nangia,
the head of the India desk for HSBC’s commercial banking division.
“Whereas the downside of making it a surprise was [that] the government
and the central bank were severely unprepared to manage the whole
situation.”
 Modi’s demonetization initiative caused a sudden breakdown in India’s
commercial ecosystem. Trade across all facets of the economy was
disrupted, and cash-centric sectors like agriculture, fishing, and the
voluminous informal market were virtually shutdown, with many
businesses and livelihoods going under completely -- not to mention the
economic impact of millions of people standing in line for hours to
exchange or deposit canceled banknotes rather than working or doing
business.
 "The unbanked and informal economy is hard hit," explained Monishankar Prasad,
the New Delhi-based author and editor for Alochonaa, an Australian current
events publication. "The poor do not have the access to structural and cultural
 resources to adapt to shock doctrine economics. The poor were taken totally off
guard and the banking infrastructure in the hinterland is rather limited. The tech
class has poor exposure to critical social theory in order to understand the impact
on the ground. There is an empathy deficit."

However, although India’s demonetization initiative was seemingly severely

mismanaged, this doesn’t mean that the entire endeavor was a complete failure.
35 days in, there are some positive indicators.
Like most other above-ground industries, India’s shadow economy had its
financial legs taken out from under it with Modi’s currency purge. Similar to the
other financial sectors mentioned above, the cash-centric black market for the
most part ceased to function with the nullification of the bulk of its currency.

“I think, in the immediate term all sorts of illegal activities, like terrorist
financing, etc... have been completely hit,” Nangia said.

While, like in other sectors, this virtual shutdown of the black market is more
than likely only temporary, there may be some longer-lasting impacts. Cashless
transaction systems have been encouraged across the board, which will not rid
India of its massive shadow economy but may make it a little tougher to conduct
business. Also, this initiative indicates that such wide-ranging, deep-striking
governmental actions to combat what it sees as corruption could happen again.
The demonetization process has also repaired India's counterfeiting problem for
the near to mid-term. It was previously estimated that 250 out of every million
Indian bank notes were fakes. This recent culling of the bulk of the country's
currency instantly rendered counterfeits as valuable as the paper they’re printed
on. It has also been reported that the new 500 and 2,000 rupee notes are less
vulnerable to counterfeiting, having advanced security features — with one report
claiming that it will be “impossible” for Pakistan (India’s counterfeiting
bogeyman) to fake them.

It is also thought that Modi’s demonetization drive will wipe out a measure of
corruption and tax evasion in India’s real estate market.

“In certain parts of the country there used to be always an official amount and an
unofficial amount for property,” Nangia explained. “Now with this so-called black
money going out of the window people are expecting that the price of real estate
is going to fall, which is going to make it more affordable for honest, tax paying
people.”

On 8 November 2016, the Government of India announced the demonetisation of all ₹500 (US$7.40)
and ₹1,000 (US$15) banknotes of the Mahatma Gandhi Series.[2] The government claimed that the
action would curtail the shadow economy and crack down on the use of illicit and counterfeit cash to
fund illegal activity and terrorism.[3][4] The sudden nature of the announcement—and the prolonged
cash shortages in the weeks that followed—created significant disruption throughout the economy,
threatening economic output.[5][6] The move was heavily criticized as poorly planned and unfair, and
was met with protests, litigation, and strikes.

Prime Minister of India Narendra Modi announced the demonetisation in an unscheduled live
televised address at 20:00 Indian Standard Time (IST) on 8 November.[7][8] In the announcement,
Modi declared that use of all ₹500 and ₹1000 banknotes of theMahatma Gandhi Series would be
invalid past midnight, and announced the issuance of new ₹500 and ₹2000 banknotes of
theMahatma Gandhi New Series in exchange for the old banknotes.

The BSE SENSEX and NIFTY 50 stock indices crashed the day after the announcement. In the days
following the demonetisation, the country faced severe cash shortages with severe detrimental
effects across the economy.[9][10] People seeking to exchange their bank notes had to stand in lengthy
queues, and several deaths were linked to the inconveniences caused due to the rush to exchange
cash.[11][12]

Initially, the move received support from several bankers as well as from some international
commentators. It was heavily criticised by members of the opposition parties, leading to debates in
both houses of parliament and triggering organised protests against thegovernment in several
places across India.[13][14][15] The move is considered to have reduced the country's GDP and industrial
production. As the cash shortages grew in the weeks following the move, the demonetization was
heavily criticised by prominent economists and by world media.

Background
The Indian government had demonetised bank notes on two prior occasions—once in 1946 and then
again in 1978—and in both cases, the goal was to combat tax evasion by "black money" held
outside the formal economic system.[16] In 1946, the pre-independence government hoped
demonetisation would penalize Indian businesses that were concealing the fortunes amassed
supplying the Allies in World War II.[16] In 1978, the Janata Party coalition government demonetised
banknotes of 1000, 5000 and 10,000 rupees, again in the hopes of curbing counterfeit money and
black money.[17]

In 2012, the Central Board of Direct Taxes had recommended against demonetisation, saying in a
report that "demonetisation may not be a solution for tackling black money or economy, which is
largely held in the form of benami properties, bullion and jewellery."[18][19] According to data from
income tax probes, black money holders kept only 6% or less of their wealth as cash, suggesting
that targeting this cash would not be a successful strategy.[20]

On 28 October 2016 the total banknotes in circulation in India was ₹17.77 trillion (US$260 billion). In
terms of value, the annual report of Reserve Bank of India (RBI) of 31 March 2016 stated that total
bank notes in circulation valued to ₹16.42 trillion (US$240 billion) of which nearly 86%
(around ₹14.18 trillion (US$210 billion)) were ₹500 and ₹1,000 banknotes. In terms of volume, the
report stated that 24% (around 22.03 billion) of the total 90266 million banknotes were in
circulation.[21]

In the past, the Bharatiya Janata Party (BJP) had opposed demonetisation. BJP
spokesperson Meenakshi Lekhi had said in 2014 that "The aam aurats and the aadmis (general
population), those who are illiterate and have no access to banking facilities, will be the ones to be
hit by such diversionary measures."[22][23][24][25]

In June, the Government of India had devised the Income Declaration Scheme, that lasted till 30
September 2016, providing an opportunity to citizens holding black money and undeclared assets to
avoid litigation and come clean by declaring their assets, paying the tax on them and a penalty of
45% thereafter.[