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Was there really a Demon in ‘Demonetization’? Or Just Stretched Thoughts?

The FY1617 Economic survey provides some interesting statistics/ anecdotes/ commentary on the recent demonetization drive. While written very judiciously, a closer look actually throws more questions on the ‘positive effects of demonetization’ and perhaps makes us believe that there was ‘NO REAL DEMON TO BE TAMED’ in this whole saga of ‘DEMONETIZATION’

Key snippets from the Economic Survey FY1617

  1. The value of high denomination notes (INR 500 and INR 1000) relative to GDP has increased in line with rising living standards. RW (Randomwalks): So all the noises on so many high denomination notes etc. may have a perfect legal reason and need not be tied to corruption as driver
  2. India is “off the line”, meaning that its cash in circulation is relatively high for its level of corruption. This suggests two possibilities. Perhaps India’s level of corruption (or other related pathologies) is much worse than the index shows. Or cash is being used for other, presumably legitimate purposes. RW: Reiterates last point that while corruption truly was through high denomination notes but seems not to be the key driver for ‘cash circulation’. Maybe we are a country who still loves to use cash for perfectly legitimate transactions
  3. RBI data show that in India low denomination notes have a soil rate of 33 percent per year. In contrast, the soil rate for the Rs 500 note is 22 percent, and the Rs 1000 just 11 percent. One way to estimate black money is to assume that all these notes should soil at the same rate, if they were really being used for transactions. RW: This espouses the fact that Indian households loves to store emergency cash (legitimate money) in home and here obviously people will prefer higher denomination to optimize storage requirement. Though the survey counters this and states that this non transactional amount is actually corrupt money and based on statistical analysis estimates black money at 3 lakh crore (2% of GDP)
  4. Demonetization will afford an interesting natural experiment on the substitutability between cash and other forms of money.RW: Was not the cost too high for common people for doing such an experiment? Consider this, RBI own estimates post Dec 31st pegged value of total notes deposited back to system at ~ 15 lakh crore, more than the initial estimates. So it means that Jugaad ensured that black was moved into system/ transformed or simply black money estimates were wrong. Either way it holds little solace to the people who suffered in this process
  5. In all these cases, black money holders still suffered a substantial loss, in taxes or “conversion fees”. Moreover, bank accounts are still being screened for suspicious transactions, which means that those who engaged in laundering run the risk of punitive taxes and prosecution, in addition to the fees or taxes already paid. RW: This is worse than consolation prize. “Conversion fees” is nothing but transfer of part of the black money from one person to another. So at best, it brings in a more equitable distribution of black money!!!. On the second point of punitive taxes & prosecution, it does not make sense. This IT department could have done w/o the entire demonetization drive by investigating other indicators of black money (fraud transactions, unaccounted wealth). In this process, now a %age of honest payers will also get harassed
  6. Demonetization will spur Digitalization in financial transactions: RW: Possibly ‘Yes’ but this advantage cannot justify the pain of demonetization. Journey to less cash is a phased, gradual journey and can’t be done as a shock & awe movement

So we can perhaps fairly conclude, that the finance ministry survey actually is at pains in itself to justify demonetization drive and perhaps this was more a ‘political One-upmanship’, devoid of any proper brainstorming of the necessity of such a exercise prior to the exercise (this is being now used to justify the sudden/ surprise nature. Even RBI Governor has been at pains in the parliamentary committee deliberation to explain transparently the RBI position & involvement in the whole exercise)


  1. Economic survey report FY1617
  2. Various news reports on Demonetization

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