Demonetization, One Year On: The Good, the Bad, and the Ugly

The shock announcement withdrawing the Rs 1000 and Rs. 500 notes on November 8th, 2016, caught the country unawares as well as sent shockwaves across the political, social, and economic spectrum leading to severe reverberations that continue even now.

Indeed, the exercise which was dubbed Demonetization, or DeMo, resulted in effects that can be described as The Good, the Bad, and the Plain Ugly, as we shall discuss subsequently. Also, it is a good time to review whether the policy had the intended effect since economists often think regarding the impact on the shorter, medium, and longer terms.

Because a year has passed since DeMo, it is certainly a good time to understand and review what went well, what went bad, and what resulted in very ugly side effects.

The Good

As a measure that was intended to check corruption and launch a war on Black Money, the intentions of DeMo were certainly good considering the fact that rampant corruption exists at all levels of Indian society as well as the fact that the Scourge of Black Money is so deep and widespread that unless, shock therapy, was administered, there was no way in which the malaise of Black Money could be eradicated. In addition, as the metaphor used by many to refer to DeMo as surgery performed on the Indian Economy, the fact that it was undertaken when the patient was healthy means that some good has certainly come out of the policy.

Indeed, the fact that the country now has a wider tax base on account of the fear of the black money holders of the law, the measure certainly helped in this respect. Moreover, the fact that world over, countries are moving towards a cashless paradigm means that if India has to join the league of developed nations, it certainly has to administer some strong medicine that is disruptive in nature.

Moreover, the move towards Digitization of payments and commercial transactions or the dream of Digital India is a good move since the majority of Indians are under 30 which mean that to guarantee a future for them; it is necessary to make a behavioral change in them. Indeed, the whole exercise was spun as an attempt to induce a behavioral change among Indians to move towards a corruption free, and digital country which is certainly needed if India has to progress.

The Bad

As mentioned above, behavioral changes take time and sudden, and shock therapies are sometimes well-intentioned, but poorly executed and implemented. In this respect, the policy clearly failed as the healthy patient, instead of recovering, went into deeper disease and the health of the Indian Economy certainly suffered. Indeed, the fact that corruption continues as before and the initial movement towards using digital payment channels has now subsidized, and the country is back to using cash means that the policy has certainly failed. Indeed, such measures should be introduced gradually and with proper planning as well as accountability means that they should be done only after due diligence has been carried out.

In this respect, the DeMo exercise was a failure since until now, and there is no clarity who recommended the measure or who was in charge of planning. Indeed, it can be said that the immediate effect of the policy was to create chaos and confusion in the minds of Indians who were unsure of the day to day changes and announcements that reeked of poor planning and awful implementation. Moreover, we still do not know who is to be held accountable for the policy apart from the fact that there is no clarity on the data that is needed to analyze the success or otherwise of the measure.

The Ugly

Clear casualties of DeMo were the Millions of SMEs (Small and Medium Enterprises) as well as poor Indians who were unbanked and were left in the lurch with the policy. The fact that India is primarily cash-driven economy meant that many SMEs closed down and the employees retrenched which led to the overall deterioration in the health of the Indian Economy. Indeed, it can be said that the condition of the patient worsened rather than improving and took a turn for the worse with the recent data showing low growth and recessionary tendencies.

Apart from this, the fact that the Indian Economy was not yet ready for a change of this magnitude means that there were very ugly effects including job losses, closure of enterprises, as well as reports of people dying out of exhaustion waiting in the lines before ATMs (Automated Teller Machines) to withdraw or deposit their money. Indeed, in this respect alone, the policy clearly failed as the poor suffered and which is ironic considering that the measure was sold as one that helps the poor.


Thus, it is clear that as of now, we are yet to come to grips with DeMo and it would be prudent to say that unless there is more investigation into what the measure achieved or did not achieve, it would be best to say that structural reforms such as DeMo often take time and clear thought as well as flawless execution before they begin to bear fruit. This means that we should wait until 2018 or 2019 to see if DeMo succeeded or failed and considering that the people are the arbiters in democracies, on a concluding note, we can say that, the effects need to be measured against the response in the elections over the next couple of years to the state and central governments.

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