Demonetisation: A Few Disturbing Questions

By Pratip Kumar Datta and Saumya Chakrabarti

In this article, the authors discuss the recent demonitisation policy introduced by the Indian government in November 2016, and what it means for the Indian economoy now, and in the future.


Demonetisation policy, announced by the honourable prime minister of India and executed on and from midnight on the 8th of November 2016, has provoked a lot of political, social and economic debates across the country and abroad. Social media too didn’t lag behind. Leaving aside debates, in the aftermath of its execution, we have been facing a lot of uncomfortable, unwanted situations. The crunch came when we were either made to wait for hours together in long, serpentine queues in front of a bank to get our legitimate savings (in the form of Rs 500 & Rs 1000 currency notes) exchanged and in the process waste precious working hours or to hunt all over to find an ATM equipped with sufficient cash to cope with the mounting demand. While parents who have fixed their sons’ or daughters’ marriages have been subjected to untold woes for want of cash, people engaged in the informal sector and small businesses have been experiencing a unique “cashless peace”. In the euphoria of demonetisation what seems to have been forgotten is that everything in our daily life boils down to cash in the end.

The over optimistic among us dream that all the big fish of the black market will be hanged on a roadside light post. But the little logical fallacy that bugs them the most is that the “big fish” live next door – a doctor / professor / teacher / lawyer! They attribute the cause of their distress to the neighbours who enjoy extravagant lifestyles. “I cannot buy a car but Dr. X has more than one car”; maybe, “the daktarsaab (medical practitioner) has huge ‘parallel income’”. “I don’t have a job but Mr. Y has just secured one – Oh! It’s obvious, he has enough political connections”, and so on and so forth. Our government exploits this very mindset quite adroitly while introducing an unwise policy measure like demonetisation.

Let us consider the two cogent arguments put forward by our government in support of demonetisation – (a) it would arrest the fake currency, circulating in our economy and, (b) black money would be unearthed and eventually, underground parallel economy would be abolished.

On the face of it, the first argument appears to be more convincing than the second one. But, unless the exact amount of fake currency notes circulating in the economy is proved to be considerable, welcoming such policy may prove to be suicidal for us in near future. It is because, those middle, lower middle and poorer sections of our population, who have preferred to stand in the queue, sacrificing their one or several days’ income, are huge in number and so, loss of their income opportunity as a whole will be colossal.

The government propaganda says, the huge money stock kept inside a pillow cover is black! Judging by what this propaganda suggests, even a street-side goods vendor, a vegetable or fish seller is also a black money holder!

Recent studies of the Indian Statistical Institute have shown that there are only 250 fake currency notes out of every 10 lakh (1 million) in circulation. In other words, fake notes worth Rs. 400 crore (1 crore = 10 million and current exchange rate is 1 USD = Rs. 68) are in circulation at any point of time within our economy (, dated: 08.06.2016). In sharp contrast, there were, as per the figures of 2012, almost 3 crore workers in India (including highly skilled, semi-skilled and unskilled ones) and the average minimum wage rate in India was about Rs. 400 only ( Given such a situation, if one worker stands in a queue for just a day, then in a macro sense, the economy would lose the opportunity of earning worth Rs. 120 crore per day! Recent report of CMIE (Centre for Monitoring Indian Economy) estimated a total GDP loss of 1.28 lakh crore as a result of demonetisation. Although they said that the estimation is only partial keeping in mind the fifty days deadline of the honourable prime minister. What a big loss to tackle just 400 crore worth of fake currency!!

Let us now come to the second logic of the government machinery. What is black money? In short, it is the money undisclosed to the government. The government propaganda says, the huge money stock kept inside a pillow cover is black! Judging by what this propaganda suggests, even a street-side goods vendor, a vegetable or fish seller is also a black money holder! But, unfortunately, it is unethical propaganda and completely wrong in terms of economic theories.

Yes, there are many doctors, lawyers, teachers, professors who earn black income, by evading income tax. However, most ironically, the major portion of the black money emerged via evasion of corporate tax, excise duty, and customs duty. It emerges from export sector, film industry and from illegal businesses like smuggling, drug peddling, women trafficking, prostitution, crime etc. It has appeared within the economy in the form of bribes and illegal commissions, informal interest earning from informal credit market etc. So, by assuming that cancellation of a few high-value currency notes will restrict all these means of black earnings, it seems like day dreaming (cancellation of 1000 rupee notes would restrict child trafficking – sorry to say, but we cannot be so optimistic!).

Interestingly, government propaganda tries to convey the impression that every white money transaction takes place via cheque and that entire black money is hoarded in the form of liquid money. But the fundamental question is, why can’t the black money be invested further in a black (or even white) business? Why should it be kept inside a pillow cover?

Unfortunately, we don’t have any recent data on black money. According to Prof R Vaidyanathan’s estimate (2007), there were about 70 foreign tax havens, where about Rs 70 lakh crore Indian black money was resting in peace, although, at that time, India’s GDP was only Rs. 43 lakh crore ( In 2006, Prof. Friedrich Schneider estimated that the amount of internal black money was only 23% to 26% of our GDP ( and the major portion of it was kept in the form of permanent assets (preferably gold and not cash inside the pillow!). A recent quote in the Huffington Post (dated: 14.1.2016), from the data provided by the Income Tax Department, suggests that only 6% of the total black income is kept in the form of liquid cash.          

So, it is plain and clear that demonetisation policy has definitely hit a section of black money holders hard but the big guns, like politicians, owners of legal / illegal business houses who are able to convert their black income into assets or are able to transfer black cash to foreign tax havens, will remain untouched. Therefore, this policy will presumably pick up only a pinch of ice from the tip of the iceberg. Unfortunately, the cost of picking up so little amount of ice is enormous in terms of GDP loss, in terms of growth sacrifice of the economy or in terms of absolute distress of the middle, lower-middle and poorer economic classes.

Simple macroeconomic logic suggests that overnight contraction of 86% of money supply cannot prove to be efficient for an economy. We should keep in mind that 86% shrinkage of liquid money supply came into action at a single point of time but the process of fulfilling the same has a time dimension. Moreover, per day bank withdrawal of a person has an upper limit. This sudden shrinkage of liquid cash will lead to shrinkage in demand of goods and services in the domestic market. As a result, production as well as employment will suffer a jolt. We are already within a world-wide problem of demand shortage and this “big bang” policy will accelerate the pace and gravity of the problem. Petty businessmen, like small road-side vegetable sellers or fish sellers, who sell perishable commodity will face a deflationary problem.

On the other hand, shrinkage of liquid cash effectively reduces the working capital of the petty businessmen and thus they will be induced to reduce their supply to the market. Millions of small firms and farmers are getting suffocated due to scarcity of cash and they are unable to pay their day-labourers. The poor day labourers have already started losing jobs in millions! This will have an obvious snowballing effect on petty agricultural and non-agricultural production, creating painful shortages in the next cycle. Needless to say, the marginal buyers will not be able to purchase their daily livelihood commodities as they are far behind the process of plastic money transaction.

This sudden shrinkage of liquid cash will lead to shrinkage in demand of goods and services in the domestic market. As a result, production as well as employment will suffer a jolt.

Most probably, transport will be the sector where the impact of this policy will be most severe, where almost 80% of transactions occur in terms of liquid cash. As per government rule, one goods carrying vehicle can spend only Rs. 35 thousand as its travelling cost. So, if a transport businessman has ten such vehicles, then the upper limit of his travelling expense would be 3 lakh and 50 thousand – which is well over the upper limit of his withdrawal ceiling from the bank (

The degree of impact of such sudden shrinkage of the economy would depend upon how long our government will take to make the money supply normal. Keeping in mind the enormous number of ATM machines installed in every nook and corner of our country, it seems the task will not be so easy for the government.

A third logic is hovering around us in support of demonetisation policy. This is the argument we have heard, in most of the cases, whenever any new policy has been introduced. It is the logic of future benefit. But how and to what extent will we benefit in future? The answer seems to be not much comprehensible. The famous economist, J. M. Keynes, in his article, The Tract on Monetary Reform, made a remarkable comment: “But this long run is a misleading guide to current affairs. In the long run, we are all dead.” In fact, how many roads we have to walk down before we reach the long run, is unknown to everybody.

Someday, money supply will be normalised, banks will start performing normally; ATM machines will start dispensing money as they did just before the “big bang” announcement of the PM, Mr. Modi; currency notes worth of Rs. 500, Rs. 1000 along with Rs. 2000 will continue flowing within our economy; black incomes will continue flowing from home to foreign countries; scams will continue creating tremors in the tea cup. In a word, nothing amazing will happen in the long run. After all, we are not that interested in fundamental institutional and structural changes; nor are we interested in changing the ethical foundation of our society – where unfortunately, individual money power rules.

An overwhelmingly surprising estimate has been published in India Today (01/12/2016). According to the publication, the policy to unearth black money is going to be insignificantly successful within the fifty days deadline of the Prime Minster. Evaluating the deposit trend of high value currency notes at the bank counters, the article shows that either there is no (or very little) black money in Indian economy or the liquid form of the same has already been transformed into assets or took the flight to any one of the seventy tax havens to enjoy the vacation well before the 8/11 (8th November). Critical minds may say that demonetisation policy is actually framed to submerge black money, not to unearth it.

Lastly, a capitalistic and democratic setup promises to guarantee the right to personal asset. Our bank deposit is secured by the commitment of on demand return of that asset. But our government is executing demonetisation policy with little or no backup plan and thus, creating huge chaos in our economy; making the lives of common people unsecured. The question naturally arises; does any democratically elected government have any right to do all these? Our government probably doesn’t even understand the basics of capitalism.


About the Authors

chakrabarti-webSaumya Chakrabarti is an Associate Professor of Economics at Visva-Bharati (University),Santiniketan, India. He has also taught at St Xavier’s College, Kolkata; University of Calcutta; and at Presidency University. Dr. Chakrabarti has been a visiting fellow at Brown University, USA. He has published in journals like Cambridge Journal of Economics, Review of Radical Political Economics, International Critical Thought, Economic and Political Weekly, Indian Journal of Labour Economics, among others; and has written books published by Prentice Hall and Oxford University Press.

Pratip Kumar Datta teaches Economics and Mathematics at Rajatpur Indranarayan Vidyapith (H.S.), Bolpur, India. Apart from teaching, he is engaged in serious research work. He had secured his M.Sc. degree in economics from University of Calcutta in the year 1997. He also secured his B.Ed degree from the same university in the year 2006. He has published papers in journals like Merit Research Journals (, Researcher’s Tandem etc. He has presented research papers at different institutes and universities of India like Burdwan University, Rabindra Bharati University, West Bengal State University, Centre for Studies in International Relations and Development etc.


The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.