March 28, 2017    5 minute read

20 Weeks Since Demonetisation, What Has India Learned?

A Report Card    March 28, 2017    5 minute read

20 Weeks Since Demonetisation, What Has India Learned?

The 8th of November 2016 marked a historic event in the lives of the current generation of Indians, when the Prime Minister announced the ban on the prevailing 500 and 1000-rupee notes. The reason stated then was to get back all the hoarded black money in the economy. As time progressed, though, the rationale for demonetisation also kept shifting. Twenty weeks into the new system, analysis becomes a must – particularly given that the future course of action depends on it.

Financial Inclusion

Was financial inclusion really a problem? With only 54% of rural India and 68% of urban India availing banking services, according to the Reserve Bank of India, this question was the most prominent one. However, the real pain point was altogether a different factor: the long serpentine queues of people outside banks and ATMs – for days on end after the policy was announced. According to World Bank’s Financial Access Survey, India has 30.43 branches per 1000km and 25.43 ATMs per 1000km, compared to China’s 1428.98 and 2975.09 respectively (with India’s population being 1.25 billion and China’s standing at 1.39bn). With a deadline of only one-and-a-half months for exchanging notes, this really caused trouble to the people and they panicked.

25 The number of ATMs per 1000km in India

According to the World Bank’s Financial Access Survey, India has 30.43 branches per 1000km and 25.43 ATMs per 1000km, compared to China’s 1428.98 and 2975.09 respectively (with India’s population being 1.25 billion and China’s standing at 1.39 billion). With a deadline of only one-and-a-half months for exchanging notes, this really caused trouble to the people and they panicked.

For an emerging economy like India it was a bold move taken by the prime minister who had good intentions in mind, and hence should be respected. However, at the receiving end were those low-income individuals who had no contacts within banks, and nor were given any preferential treatment because of their status. As a result, they stood in same queues for days, risking their means of livelihood while the medium-class used ‘chotus’ (errand boys who stand in queues on one’s behalf in a bank – and yes, there is also a start-up in the capital city called ‘Book My Chotu’). The uppermost class used direct connections to get their currency exchange done.

Expenses and Electioneering

With the elections in one of India’s biggest states, namely Uttar Pradesh, around the corner at the time of implementation, it was thought that demonetisation would bring down parties’ expenditure during canvassing and campaigning. But the survey conducted at the recently concluded elections painted a different picture altogether.

The Government of India had revised election expenses ceiling for candidates in early 2014. As per the revised ceilings, the maximum limit of election expenses for the Assembly Constituencies in Uttar Pradesh is 2.8 million rupees per candidate. Assuming as many as 403 different candidates contesting for 403 seats (as a hypothetical scenario) in Uttar Pradesh, expenditure should be around 11.3 billion rupees. However, according to the Chief Minister’s pre-post poll study, actual expenditure in UP polls was a whopping 55 billion rupees.

This includes 10 billion rupees spent in ‘Notes for Votes’, with over one-third of voters admitting to taking offers in cash as well as liquor, according to a survey by The Economic Times. In fact, the survey concludes that demonetisation led to an increased spending on the polls because of the higher-denomination 2000 rupee notes.

Demonetisation and Digitisation

Did India go digital? This was never on the agenda for the government’s initial plan for demonetisation. But it popped up as the crowd started panicking and the short-term aim of curbing black money seemed implausible. It was a soothing balm to those who have their money invested in India and feel that the Indian economy is crumbling under the weight of demonetisation. Digital transactions, according to government data, showed a 300% surge post-demonetization. This included the usage of e-wallets and ‘Ru-pay’ cards as well. However, no data on the distribution of the surge between rural and urban areas was actually published. Hence, whether India really did go digital on a wide scale cannot be answered.

According to JPMorgan, the cash crunch faced by households and small and medium enterprises (SMEs) has impacted both demand and supply. This has led to a decrease in total transaction value.The much-hyped usage of mobile phones and e-wallets also did not show an ‘explosive rise’ as was predicted. Mobile banking actually fell 7.4% month-on-month in terms of number of transactions to just 72.3 million rupees, according to The Times of India.

Lessons for the Future

The only thing that demonetisation has already achieved in India is the creation of fear in the minds of individuals who stack up notes in their houses, now fuelled by rumours that demonetisation of 100 rupee notes is also in the pipeline for Modi’s government.

Almost five months into demonetisation, the target behind it seems incomplete. But it is still a small time to judge as huge a move as this on an emerging economy such as India. To bear positive results out of the move, the government should firstly focus on increasing consumer demand to make up for the slump in its GDP growth rate. This should be followed by strict measures such as the disclosure of wealth by high-profile individuals and the inclusion of disclosures of expenditures surrounding the donations to parties during election campaigns, according to the Right To Information (RTI) Act. This will provide transparency to the system and will help in fulfilling the main aim of demonetisation.

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