Five years ago today, India’s prime minister Narendra Modi, took the radical step to take all 500- and 1,000-rupee notes out of circulation in a bid to tackle ‘black money’ in the Indian economy.
Surprise announcement
The decision was announced at 8 pm and came into force from midnight. Policy makers believed that surprise and secrecy were necessary to catch black-money hoarders off guard to prevent them from getting rid of their illegal funds over the next four hours. However, crowds were seen buying jewellery and property. Some black money got converted into assets that could be monetised later on.
We are five years on, but the fallout from Narendra Modi’s announcement that his government would be perusing a policy of Demonetisation feels like yesterday: the decline in wages, the queues outside banks, the hit to farmers and the agricultural industry, the spike in job losses for those working in unorganised retail, the 1.5 million jobs lost and the 150 million people left without pay for weeks across India.
The currency notes that were demonetised on November 8, 2016, have finally been counted and accounted for by the Reserve Bank of India (RBI), according to its annual report for the year 2017-18. The report states that currency notes amounting to Rupees 15.31 lakh crores have returned to the banking system. These numbers represent around 99.3 per cent of the total currency notes that were in circulation when Narendra Modi announced the demonetisation of 500- and 1,000- rupee notes. At the time of the decision, the total value of these high-value currency notes in circulation was Rupees 15.45 lakh crores.
Demonetisation and Black Money
Demonetisation, as a measure to restrain black money, has been in existence for a long time in the world of economic policy. There is not much evidence however on the relationship between demonetisation and the subsequent reduction in black money. Many leading economists including Arun Kumar, C. Rammanohar Reddy and Raghuram Rajan have observed this trend and the previous attempts at demonetisation undertaken in other countries, such as North Korea, Myanmar and Nigeria revealed that after the initial period of demonetisation, the previous situation tends to repeat itself.
Five years after demonetisation, high value notes comprise 85.7% of total value remains high
Five year later, the high value notes – the Rs 500 and Rs 2,000 denomination bank notes – continue to be very high, constituting 85.7% of the total currency in circulation.
The Rs 500 note, in terms of value, is 68.4% of the total currency notes in circulation as at the end of March 2021, RBI data showed. The Rs 2,000 notes constitute 17.3% in value.
The Rs 500 note gained in terms of value over the last five years, while the total value of the Rs 2,000 bank notes fell.
Before the demonetisation exercise, the value of Rs 500 was 47.8% of the total value. The value of Rs 500 note has gone up sharply in the last five years, which is 68.4% as of end March 2021.
When the Rs 2,000 note was introduced in November 2016, its value in total circulation was 50.2%. Since then, its value in total circulation dropped to 17.3%, recorded at the end of the financial year 2020-21.
ALL NOTES CAME BACK TO THE RBI.
The composition of the high value bank notes – Rs 500 and Rs 2,000 – in terms of their volume in the total circulation also underwent interesting changes over the last five years.
According to Reserve Bank of India data, 38,679 million pieces of the Rs 500 note are in circulation as on March 31, 2021 – which constituted 31.1% of the currency in circulation, in terms of volume.
There were 2,451 million pieces of the Rs 2,000 note in circulation as on March 31, 2021, which is merely 2% of the total value of notes in circulation.
When the demonetisation exercise was announced, Rs 500 notes formed 17.4% of the total volume of notes, while Rs 1,000 constituted 7%.
The number of Rs 2,000 notes in circulation has fallen in the last five years. From 3,285 million pieces in March 2017, it has fallen to 2,451 million pieces as of the end of March 2021.
The share of Rs 2,000 notes peaked by the end of March 2018 when there were 3,363 million pieces of such notes in circulation. In the last three years, the number of pieces has fallen by 912 million. In terms of volume, the Rs 2,000 note is now only 2% of the total, as compared to 3.3% in 2018.
BUT IT SIGNIFICANTLY REDUCED COUNTERFEIT NOTES.
It was quite common for people to encounter fake notes while depositing cash in banks in the pre-demonetisation period. Most bankers and people preferred to destroy such notes in place of formally reporting or lodging police FIRs.
RBI’s reported Rs 274 million worth of counterfeit Rs 500 and Rs 1000 notes in 2015-16 was certainly a grossly under-reported assessment. The real culprit -- the high-quality counterfeit notes -- almost disappeared post demonetisation, though there were numerous instances of poor fakes or copies being seized by the police. For at least one year post-demonetisation, there was not a single high-quality counterfeit note of ₹2000 detected.
Five years later, it’s even more clear that demonetisation was a disaster for India.