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Business News/ Opinion / Online-views/  Demonetisation, one year later. Success or failure?

Demonetisation, one year later. Success or failure?

If you look at demonetisation in isolation and the shock it gave to the Indian economy, it failed. But step back and see it as part of a larger plan to weed out corruption, a different story begins to emerge

Photo: Pradeep Gaur/MintPremium
Photo: Pradeep Gaur/Mint

Most people have a “where I was" story about the night of 8 November 2016. Some of us also have a story on ‘how much money I had’ on the night that Prime Minister Narendra Modi invalidated 86% of Indian currency. I was just dragging myself back home after my Iyengar yoga class (those who join the Beginners will identify with my use of the word ‘dragging’), ready to eat some dinner and collapse. But of course, the team and I were up until midnight, reporting and writing on the biggest news of a personal finance journalist’s lifetime. How much money did I have? I had three Rs500 notes that day. Having moved to cards and then digital, I’d moved my household staff to bank accounts and electronic transfer of salaries some years back. Cash was needed for everyday buying of milk, bread, eggs, vegetables kind of stuff. The local Mother Dairy booth was accepting old notes for future purchases, so I was spared the lines to deposit my money. We all have our stories of what happened that night. This was mine.

Apart from the personal shock to our money lives, demonetisation quickly became a huge political, social and intellectual battle. The battle lines got drawn deep in the ground and your pro- or anti-Modi stance decided where you stood on the demonetisation debate. I wrote a column one day after demonetisation in which I said that the step will raise the cost of black money, it will not eliminate it. That it is one step in a larger plan to go after corruption. You can read it here: How does it look a year later? Modi gave four reasons for demonetisation: to curb corruption, black money, fake notes and terror finance. To judge the success or failure of demonetisation on these four metrics is almost impossible because demonetisation was one of the several weapons the government has deployed against these issues. But let me try and unpack them.

Has there been a dent in corruption and black money? Anecdotal stories say that high-level corruption in the central government is gone, but the cancer of graft elsewhere in the system still thrives. It is unrealistic to expect the deep-rooted habit of graft to disappear overnight, but at least there is serious political will behind the anti-corruption war in India today. What of black money, or money on which income tax has not been paid? Black money is back in the system—talk to any builder (real estate is the biggest sump of black money and talking to builders is a quick way to figure out if cash deals are back) and they say it is as if demonetisation never happened. But they admit to the cash ratio going down and the fear factor lurking at the back of every deal.

Look next at the data on currency in the system and digitisation. Reserve Bank of India data shows that currency held by the public is now down almost 10% as compared to last year. Currency in circulation is down by 17%, says the ministry of finance; this means that more than Rs3 trillion, which was earlier cash in circulation, is now part of the formal financial system. Financialisation of household savings got a hard push with demonetisation with assets of life insurance products and mutual funds showing an uptick post demonetisation, and cash-based real estate is still to recover.

Digitisation of transactions is growing with the value of NEFT (National Electronic Funds Transfer) transactions rising from Rs9.5 trillion to Rs12.5 trillion over a year. Digital transactions leave a trail and the more India moves to such transactions, the bigger is the blow to black money.

A metric to measure the impact of demonetisation on black money would be tax compliance. Rising tax compliance is a win for the war on corruption. A ministry of finance press release (you can see it here: says that the number of returns filed as of August 2017 was up almost 25% compared to an increase of about 10% a year ago. The Economic Survey puts the number of new taxpayers due to demonetisation at about 540,000 in FY17, with a possible rise in returned income at Rs10,587 crore. You can see the table here: These are clear short-term gains in tax compliance and will need a sustained effort to keep the momentum going.

The government’s expectation that a chunk of the cash will not come back and therefore will hurt the corrupt disproportionately did not play out the way it was forecast. Almost all of the notes returned to the system as brazen operators found ways to game the system using a mix of dirty bankers, Jan Dhan accounts, poor people who lined up for them, shell companies and false invoices to justify the cash. A cat-and-mouse game began to catch the bad guys. The government changed track and used the money deposited to identify disproportionate assets. Deposit data was used by the tax department to identify people with cash deposits disproportionate to their previous tax returns. The May 2017 status report of Clean Money Operation of the income-tax department ( says that just under 1.8 million people were identified with such deposits; post-verification, over 900 groups were searched and undisclosed income of over Rs16,000 crore admitted. More than 400 cases have been referred to the Enforcement Directorate or Central Bureau of Investigation and 56 persons have been arrested. These are tiny numbers today, but it is a start. The box shows some examples of how different categories of people tried to launder money.

As the news came that shell companies were being used to launder old currency notes, the ministry of corporate affairs began a crackdown that has resulted in about 224,000 companies being struck off the records for being inactive for two years. Most likely to be shell companies, or companies formed to avoid taxes and launder black money, these firms had their bank accounts frozen. Around 309,000 directors who were on the boards of companies that had not filed returns for three years have been disqualified. (You can read the report here: The same report mentions a preliminary enquiry showing that Rs17,000 crore had been deposited and withdrawn during the demonetisation process. It is small potatoes in a country where the parallel economy is supposed to be almost equal the formal one and the data in the years to come will show success or failure on this metric. A Mint news report says: “Heightened surveillance and a crackdown on black money has led to a three-fold increase in PAN (Permanent Account Number) registrations." You can read the story here:

What about terror financing and fake notes? In a 20 August 2017 Rajya Sabha written reply, Minister of State for Home Affairs Hansraj Gangaram Ahir said that demonetisation resulted in “significant positive impact on most theatres of violence in the country including stone pelting incidents in J&K (Jammu and Kashmir). Since illegally held cash forms the major chunk of terrorist funding, after the demonetisation, most of the cash held with the terrorists turned worthless. Demonetisation also led to instant extinguishment of Pakistan-printed high quality Fake Indian Currency Notes. It also adversely affected the hawala operators." But this is government spin, is it not? Here’s the thing, we can’t be selective in accepting government data or information in written replies in Parliament. If we believe government data when the growth rates fall, we should equally believe it when the data shows a positive trend. Government claims can be verified, but we cannot paint all government data as fudged, or be selective with what we want to agree with. Google ‘stone pelting’ and see how the incidence of this form of attack against the armed forces in Kashmir has gone down drastically.

So was Demo a success or a failure? Look at Demo in isolation and count the human cost of the few months without cash and the shock to the economy—it failed. Step back and see Demo as part of a larger plan to weed out corruption, with it being just one weapon in an armoury that has the freshly empowered the Benami Transaction Act, digitization of money, linking Aadhaar to benefits and transactions, the Goods and Services Tax (GST) and the Bankruptcy Act, and a different story begins to emerge.

Narendra Modi took a huge political risk with Demo by doing something that would affect each person and not just one section and with that he pressed the reset button on corruption. For a deeply corrupt nation, any anti-corruption move has to be multi-pronged and results will take at least half a decade to play out. But the early successes are showing up in the data.

The Tom and Jerry show

These are two examples from the 10 given by the tax department that give the methods adopted for conversion of unaccounted cash by various categories of people. 

Hyderabad-Based Doctor: The doctor was found to have deposited more than Rs11 crore in specified bank notes after 8 November 2016 in three bank accounts. During questioning, the individual could not provide any document to substantiate the source of the deposits, which was later admitted as undisclosed income. Prohibitory orders were initially placed on the bank accounts, which were later lifted and a sum of Rs7.50 crore was seized. 

Demonetisation also forced government employees to deposit unaccounted cash in their bank accounts

Government employee in Bhubaneswar: A government employee was searched on the basis of information on unexplained cash deposits into the accounts maintained with various banks in his own name as well as in the name of his family members. Investigations also revealed that his wife, a homemaker with no ascertainable sources of income, had purchased land in Bhubaneswar by making a cash payment of Rs53 lakh, the sources of which could not be explained. A total cash of Rs2.28 crore has been seized in this case. The matter has also been referred to the state vigilance department.

Source: Operation Clean Money Status report May 2017.

Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint and on the board of FPSB India. She can be reached at

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Published: 07 Nov 2017, 05:02 PM IST
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