Demonetization, the gamble that Narendra Modi Government lost.

The day of November 8, 2016, was fateful in the history of independent India as well as the world. Populist, flamboyant, and despotic Donald Trump won the United States Presidency. The same day the Narendra Modi administration banned 86% of transactional currency in India, in his demonetization fiasco.

This secretly planned and hastily executed task was inconceivable to not just ordinary citizens of India but also the higher echelons of the political class. Panic and chaos could be seen on the streets immediately after Narendra Modi announced his decision. For more than a month, serpentine queues brought the nation to an exasperating halt.

The unpreparedness of the government, as well as the Reserve Bank of India, was evident from the shortage of cash in banks as well as ATM Vending machines. Around 1.5 million people lost their jobs in four months from demonetization. India’s largest organization of manufacturers AMIO reports that in the first 34 days since demonetization, micro & small-scale industries suffered 35 per cent jobs losses and a 50 per cent dip in revenue.

The government had highlighted few primary objectives for this decision, such as a move to eradicate black money, curb terror funding, and formalize the economy. Nevertheless, the whole exercise turned out to be disastrous for the unorganized sector of India. Operations in the small and medium industries came to an uncomfortable standstill.

Agriculture received a huge setback as lack of liquid money sucked up demand from the market. Small merchants and businesses suffered an irreparable loss of revenue and investment. National productivity squeezed altogether as people started spending much of their day outside banks clamoring for cash. Government and RBI kept changing regulations frequently that clearly demonstrated their negligence, dereliction, and miscalculation.

RBI revealed that Rs 15.44 lakh crore of money was demonetized and the value returned to the banks was Rs. 15.28 lakh crore. The amount of money spent on printing notes was Rs. 7956 crores. RBI said its income for 2016-17 decreased by 23.56 per cent while expenditure jumped 107.84 per cent.

Digitization of economy and cashless economy rhetoric was apparently no less than a propaganda tool. As the opposition parties rallied vehemently, former Prime Minister Manmohan Singh made an ominous statement in the Parliament. He spoke at length about how demonetization would cripple the economy that would take immeasurable time to recover, and that the GDP growth rate of India would reduce by 2 percentage points. His prognostication turned into reality.

India’s GDP growth rate declined to 5.7% as per latest estimation owing to lack of private investment, the slowdown of SMEs, and lackluster demand in the domestic market. Not a few months back, India was a shining spot in the dim global economy. Presently the numbers are worrisome enough for the BJP government to panic, which just two years away from re-election.


The question arises as to whether demonetization was a success or failure. The Reserve Bank of India finally pulled out the data and revealed that 99% of invalidated high-denomination notes were returned to the banks. This practically means that we are back to square one. The tall claim of the government that black money would be pushed out was rendered useless. In fact, more money was spent in printing the notes and operational costs at the period of demonetization.

In a less economic and more political gamble, the BJP government miserably failed to live up to the expectations of the citizens. It was a charade of reforms that ultimately worsened the health of a thriving economy. Indian economy continues to suffer from the colossal twin balance sheet problem, and exports haven’t picked up yet. Even rupee is appreciating against the dollar. The situation is so diabolical that heated debates are flowing across the corridors of power whether the government should go for the Keynesian fiscal stimulus policies.

Raghuram Rajan, former RBI governor, and media’s favorite, came up with her explosive yet subtle views on his divergence over demonetization. Mr. Rajan returned to academia in the United States as he wasn’t offered another term as the Governor, much to the dismay of public. His righteousness, unequivocal stand in economic governance, and candid views made his one of the most followed central banker of the world. Rajan is also celebrated for his prediction of an economic crisis before the 2008 recession. His credibility and outspoken attitude were not appreciated much by the present administration.

Source: Hindustan Times.

He has spoken his mind through his newly authored book “I Do What I Do”.  The book is an extensive illustration of his stint as a RBI Governor, and his ideas about the Indian economy. Rajan writes about the five pillars of RBI’s financial sector policies. Although veiled, he made a scathing and blatant advisory against the government, reminding them that RBI Governor is not just another bureaucrat and hence won’t fall into complacency and cronyism. He strongly advocated for greater autonomy to the central bank. Explaining his famous “Dosanomics” again, Raghuram Rajan has explicitly written about inter alia the fighting inflation, competition in the banking sector, broadening and deepening markets, financial inclusion tactics, and several international issues. Giving subjective and sensible macroeconomic advice, he discusses the global financial crisis and economy as well.

His view on demonetization has landed the government in trouble, something that became the strongest weapon of Indian media to ambush the present central administration. Raghuram Rajan clearly states that since 99% of the cash has been formalized, clearly the objective hasn’t been achieved and that the short-term losses outweigh the long-term gains. He made an interesting observation that the black money hidden by the people was a source of interest-free loan amount to the banks, and now post-demonetization the government is paying extra interest on that illicit money converted into white as it got deposited into banks.

He also raises the issue of declining exports, while appreciating the structural reforms taken by the government such as GST and Insolvency and Bankruptcy Code. With his statements, the failure of demonetization is making the BJP government jittery. The political opposition is already upping the ante, and the verdict of the public anger would soon be visible and consequential in weakening the government’s mandate or possible defeat.

Article by mausam.

Demonetization, the gamble that Narendra Modi Government lost.


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