Examining Demonetisation

In News

• The Supreme Court recently said that it will have to examine the 2016 demonetisation decision.

More about the news

• Petitions:
  • The petitions are challenging the demonetisation of Rs 500 and 1000 currency notes by the government.
• Government’s stand:
  • Centre has taken the stand that in view of the subsequent developments and passage of time, it has now become an academic issue.
• Court’s opinion:
  • The court wants to examine the 2016 demonetisation decision to decide whether the issue has become a mere “academic” exercise.
  • The court has asked the Centre and the Reserve Bank of India to submit their response to the petitions.
  • Judicial review:
    • The Supreme Court said that it is aware of the “Lakshman Rekha” (limitations) on judicial review of government policy decisions. 
    • But the manner in which it is done and the procedure is something which can be examined.

More about demonetization

• About:
  • On 8th November 2016, the Government of India announced the demonetisation of all ?500 and ?1,000 banknotes of the Mahatma Gandhi Series. 
  • It also announced the issuance of new ?500 and ?2,000 banknotes in exchange for the demonetised banknotes.
  • There were three main economic objectives behind demonetisation:
    • Fighting black money, 
    • Fake notes and 
    • Creating a cashless economy by pushing digital transactions. 
• Outcomes of the exercise:
  • Black money:
    • Among those targets, the biggest one was tackling black money. 
    • Black money refers to cash that is not accounted for in the banking system or cash for which tax has not been paid to the state.
    • According to RBI data, almost the entire chunk of money (more than 99 percent) that was invalidated came 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.
    • Thus, data suggests that demonetisation was a failure in unearthing black money in the system. Meanwhile, instances of black money seizures continue.
  • Fake Notes:
    • RBI’s annual report, submitted that ?15.44 lakh crore worth of currency was demonetised. 
    • The withdrawn money amounted to 86.4% of the currency in circulation at the time. Only ?16,000 crore out of the ?15.44 lakh crore was not returned. 
    • Only .0027% fake currency was “captured” following demonetisation.
  • Digitisation of economy:
    • As per RBI report, demonetisation has made India a lesser cash-based economy. 
    • In the initial days of trouble conducting business in the face of an acute cash crunch, more and more entities had to shift to digital to do business. 
      • After return of the cash, the growth in digital payment had been modest.
    • Supported in the Pandemic:
      • The creation of digital infrastructure post-demonetisation helped India in coping with the pandemic. 
      • As the tools for faceless transactions were mostly in place, it became easier to move towards contact-less transactions.
• Major Issues associated with the demonetization exercise:
  • No separate Acts:
    • Demonetisation in 1946 and 1978 were implemented through separate Acts debated by Parliament. 
    • In 2016, it was done through a mere notification issued under provisions of the Reserve Bank of India Act, 1934.
  • Central Bank had rejected key justificantions:
    • Central Board of the RBI gave its approval to the scheme but also rejected, in writing, two of the key justifications — black money and counterfeit notes.
  • Other:
    • 11 crore people stood in queue to change their own money. 
    • Farming community was at a loss. It was sowing season. 
    • Wholesale markets shut down. Prices crashed. Retail saw a “calamitous” drop in sales. 
    • Industry halted and 15 crore daily labourers were left without work.
    • Some say demonetisation broke the back of rural economy where cash was dominated and disrupted supply chains. 
    • It is estimated that 1.5 million jobs were lost.

Way ahead

• Debates still rage about whether the note ban was a prudent step in the Indian economic context. 
• Failure at large:
  • An analysis of the data reveal that demonetisation has failed to meet its stated goals except in certain areas such as encouraging more digital transactions and more formalisation of the financial system. 
• The pain associated with the exercise has far outweighed the gains:
  • While there certainly has been a discernible uptick in digital payments, it is doubtful whether the elaborate exercise to unearth black money — the stated and primary goal of demonetisation — was worth it. 
• We as a Nation may not be able to undo something that has happened, but whether in the future such power can be exercised or not can be looked into.