Awful arguments were made against demonetization

Demonetization, before India implemented it in the worst possible way, was a somewhat respectable clean-up idea.
Demonetization, before India implemented it in the worst possible way, was a somewhat respectable clean-up idea.


The poor thought, even many months after demonetisation, that it was an attack on the country’s rich.

The verdict of the Supreme Court, a few days ago, that demonetization was lawful is probably the last time that bizarre event would be national news. Demonetization was an incredible time, and such a period is conducive for bad analysis, much of which has endured. The worst argument associated with demonetization is also the most popular ‘reason’ given for its apparent failure.

One evening in 2016, Indian Prime Minister Narendra Modi said high-denomination notes, or 86% of India’s cash in circulation, would be cancelled overnight. The official objective was to shock and impoverish hoarders. All Indians could return old notes to banks. The government expected hoarders of illegally earned cash not to do so and reveal themselves. Eventually, the Reserve Bank of India said that 99% of the old cancelled cash was returned to banks. And an argument grew that demonetization was a colossal failure because almost all the cancelled money was turned in. This is one of the worst arguments ever.

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Demonetization was, of course, a nightmare, and there could be sound arguments that establish why it failed to achieve its objectives, but the evidence is not in the 99% of notes returned.

Of course, the cash was returned, by both criminals and regular people, but the process was not the same for both. Hoarders of illicit cash had to offload money at a substantial loss. They gave cash at huge discounts to those willing to absorb their stash from them. According to some stories I heard, hoarders got only 500’s worth for every 1,000 they got rid of. Cash launderers then deposited it in bank accounts that were too modest to attract attention. So it is not surprising that most of the illicit cash, divided into smaller tranches, went back into banks. As long as people were not burning cash, the notes were destined to go back in.

An unknowable quantity of counterfeit currency, and here I am not referring to the meagre number of fake notes that were detected, was surely obliterated. The return of 99% of once-legal tender does not reflect the mass disappearance of counterfeit notes.

The second bad argument associated with demonetization is that the Bharatiya Janata Party (BJP) survived demonetization because of the popularity of Narendra Modi. As we know, the party and Modi not only survived the disastrous effects of demonetization, but also thrived. We forget how incredible that feat was. Indians could not access their own money for many days; and the economy visibly shrank. Yet, Modi and the BJP won over a dozen elections at various levels in the months that followed. If the truth of demonetization was everything that the critical media reported, what explained the party’s success? An argument grew that it was because Indians had grown enamoured of the Prime Minister.

Modi’s popularity was perhaps at its peak at the time, and this may have helped in the first few days of demonetization. It does not explain why the BJP won polls across India for months afterwards.

The fact is, the poor and others who are ‘average’ in other ways had exaggerated respect for the idea of demonetization when it was implemented. They suffered, but they did see the point of it. Their own reasoning might have been faulty, but it is simply not true that they suffered in silence and mysteriously went in droves to vote for Modi and his party again and again. It does not make sense.

Rather, what likely happened was that the poor thought, even many months after the event, that it was an attack on the country’s rich. Intellectuals pointed to long lines of middle-class people outside ATMs and asked where the rich were in those queues; surely the poor can see that? Actually, the poor saw the rich stand in queues for cash, and the ‘rich’ were us.

The poor do not distinguish between people who own Skodas and people who own Mercs —they are all the same, the rich, and the rich were visibly brought to their knees outside ATMs. So Modi’s popularity survived not because of blind adulation of him, but because of wide resentment for people like us, direct employers of the poor. The poor did suffer more than us, as they normally do in any calamity, but they were probably consumed by the reasoning that if they suffered so much, the rich, who had more money, would be suffering more.

The third bad argument, which has also endured, is that every single aspect of demonetization was a failure.

Demonetization, before India implemented it in the worst possible way in 2016, was a somewhat respectable clean-up idea. In fact, people forget that in 2010, when the anti-corruption movement entered its spiritual phase, Baba Ramdev, who had joined the scene, publicly called for the cancellation of high-denomination notes. This proposal seemed interesting for a few days before it was forgotten. I have a theory, by the way, that Baba Ramdev’s pronouncements have served the BJP as test balloons for impending policies.

Demonetization destroyed the confidence Indians had in hoarding cash, especially illicit cash. I had thought at the time that the confidence in illicit cash would be destroyed forever, transforming how real estate is bought and corruption is conducted in India. I might have been wrong about that sort of impact. Still, I do not accept the view that the illicit cash system is as robust today as it was before demonetization. Illicit cash is largely back, but not the way it was before.

Demonetization did point out to India, in an unforgettable way, that operating with cash is risky.

Manu Joseph is a journalist, novelist, and the creator of the Netflix series, ‘Decoupled’.

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