1 year of DeMO: 5 reasons why note ban was a nightmare

New Delhi : A year ago Prime Minister Narendra Modi announced that Rs 500 and Rs 1000 notes will not be legal tenders, effective from midnight. The announcement, aimed at rooting out corruption, black money and terrorism, took out 86 per cent of currency in circulation in one strike. 

While the opposition called the move pointless, the government tried to rally the nation behind the economic revolution. 

One year down the lane, the government has not been able to achieve any of the projected goals. What demonetisation has achieved is increased financial inclusion and cashless transactions. 

But at what cost? 

Let's have a look at the downfalls of demonetisation: 

50 days of nightmare

The sudden scrapping of 86 per cent of currency in circulation plunged the country into chaos and frenzy. Banks and ATMs witnessed long queues while small businesses suffered temporary financial losses. The situation was even worse in rural India where people struggled to exchange and withdraw cash due to lack of enough number of banks and ATMs in their vicinity.

According to a recent survey, at least 65 per cent people faced serious problems due to demonetisation, while at least 90 died due to issues related to note ban. 

Anti-poor 

Arguing that note ban was falsely marketed as pro-poor, Pratap Bhanu Mehta, vice chancellor of Ashoka University wrote in Indian Express that demonetisation was supposed to accelerate growth, but in the short run, it dented the upward economic graph two per cent. Human cost of this two per cent GDP slow down is high and hits the poor in the worst manner, he added. 

Disruption in trade

Demonetisation impacted a large part of trade ecosystem, which is used to doing business only in cash. No cash meant no business and would have certainly impacted small businesses and hampered employment.

According to industry experts, small and medium businesses were divided on the experience as not ban benefitted those who paid taxes and adversely affected who made money by cutting corners in taxes. 

In Punjab's Ludhiana, the textile industry was hit as it comprised of both sorts of players. 

“Demonetisation killed the business for knitwear garments at a time when sales were supposed to peak. The hosiery market spread around 200 km of Ludhiana was the worst hit as it was dominated by cash transactions,” Vinod Thapar, president, Knitwear and Textile Association told Economic Times. 

“It was the worst phase for the seasonal Rs 1,200 crore hosiery industry and the yearly sales were reduced to less than half,” he added. Some businessmen said demonetisation worsened the labour shortage as migrant workers went home after manufacturing units took a hit. Within a week domestic sales fell 40%, Thapar said.

Loss of consumption

Demonetisation sucked the cash out of the system which temporarily impacted consumption for at least one quarter. The disruption hurt the traders hard while they were grappling with the effects of lack of labour and increased IT pressures. 

Black money persisted

Another problem is that this move targeted the black money, but many people who had not kept cash as their black money and rotated or used that money in other asset classes like real estate, gold and so on were not affected by demonetisation. It turned out that more than 99% of demonetised currency came back to the RBI and was accounted for. Therefore, the government’s claim about black money fell on its face.