Demonetisation, 5 years on: Key economic indicators paint a mixed picture

On November 8, 2016, Prime Minister Narendra Modi had announced ‘demonetisation’ to weed out black money from the country. The move, which saw the currency notes of Rs 500 and Rs 1,000 denominations getting banned, wiped out 86% of India’s currency overnight.
 
The currency with the public, which stood at Rs 17.97 trillion at the time, declined sharply to Rs 7.8 trillion in January 2017, soon after demonetisation. A few months later, of the Rs 15.41 trillion which had been demonetised, Rs 15.31 trillion came back to the RBI. So, more than 99% of the demonetised currency notes were returned to the banking system.
 
Large cash deposits have given rise to inquiries from probe agencies like the I-T Department and the Enforcement Directorate against millions of account holders. The government’s efforts on this front remains a work in progress. A few months ago, the RBI asked banks to not destroy the CCTV footage of their branches from the demonetisation period.
 
What is the status five years later?
 
 THE FIVE KEY INDICATORS
 
1. Cash still rules: Circulation touched all-time high of Rs 28.3 trillion on October 8
2. Digital transactions: These, including UPI, have also touched an all-time high
3. No. of UPI transactions: Up from just 0.29 million in Nov 2016 to 4.2 billion now
4. Value of UPI transactions: A record high of $103 billion last month
5. Currency in circulation: Growing in line with nominal GDP growth
 
Reserve Bank of India data show that the cash in circulation as on October 8 this year reached an all-time high of Rs 28.3 trillion, proving that cash is still the king. This figure is 57% higher than the level seen right before demonetisation. The demand for cash also increased ahead of the festival season. The currency in circulation has been growing in line with nominal GDP growth.
 
As a percentage of GDP, too, the cash in circulation has jumped sharply from 8.7% in FY17 to 14.7% in FY21.
 
At the same time, the government’s efforts to digitise the economy have also borne fruit. The number of transactions done through the Unified Payments Interface (UPI) has seen an exponential rise since demonetisation – from just 0.29 million in November 2016 to 4.2 billion now. The value of UPI transactions touched a record high of $103 billion last month.
 
Reducing India’s dependence on high-value notes was another goal. But data from RBI’s latest annual report show that the share of high-value currency notes like those of Rs 500 and Rs 2,000 in terms of volume increased to 33.1% by the end of financial year 2021 from 9.2% in FY17. One in three notes in circulation as of March 2021 was of Rs 500 denomination. In FY16, the share of high-value notes like Rs 500 and Rs 1000 was at 24.4%.
 
One indisputable fact, however, is the formalisation of the economy in the past few years. A report by State Bank of India’s economic research department last month said that India’s informal economy shrank during the pandemic year. The research showed that the country’s informal economy contracted from 52% of GDP three years ago to 15-20% in FY21. Although the pandemic caused most of this transformation as the informal economy was the worst hit, some of it has been due to demonetisation and the implementation of GST.
 
On the long-term changes that have happened since demonetisation, N R Bhanumurthy, economist and vice-chancellor of BR Ambedkar School of Economics, said:
 

• Formalisation not just because of demonetisation
• Increase in online transactions, GST led to formalisation
• Formalisation came at the cost of informal sector
• ITRs, employees in formal sector rose after note ban
• Covid-19, lockdown increased cash in hands of people
• If informal economy shrank, black money would have come down too