Nova workboard

a blog from young economists at Nova SBE

Demonetization in India: Big Policy Failure!!

On November 8, 2016 the Government of India announced demonetization, a move that rendered 86 percent of India’s currency worthless in a matter of few hours. According to Investopedia “Demonetization is the act of stripping a currency unit of its status as legal tender”. As dictated by the Government Rs.500 and Rs.1000 notes of the Mahatma Gandhi series were no longer legal tender and were to be replaced by the newly printed Rs.500 and Rs.2000 notes.  It was move that targeted to combat to tax evasion by “black money” held outside the formal economic system and curb corruption and terrorism and promote the economy to move towards cashless economy by digitising transactions. However, according to me demonetization was a move that not only failed to achieve its objective but was also a reflection of how one economic move can have adverse and far reaching consequences for any economy. This post however will primarily focus on the aftermath of the move and its impact and how it all was a big failure of a public policy.

As demonetization was announced without any prior warning, in a country like India which is still a cash dependent economy, chaos ensued. The immediate repercussions of the move were shortage of cash and most citizens had to stand in long queues to exchange the old banknotes. Further, because the new notes had different dimensions and specifications compared to the old notes, even the ATMs across India had to be re-calibrated. To further complicate the matters, Government had put restrictions on daily amount of cash that could be withdrawn. Of the Rs.15.4 trillion that was demonetised, Rs.14.97 trillion were deposited back into the banks which was far greater than the Government estimate. Hence, the Government’s objective of curbing black money circulation was not entirely successful.  Further, agriculture and industrial production took a hit as they are heavily dependent on cash and the purchase of raw materials was delayed due to cash shortage. Another thing that further puts a blip on the whole scheme of things is that the country lacked the infrastructure required to truly go for a cashless economy.

For schemes that are going to be implemented without any prior information dissemination to the public, like demonetization in India, it is essential that proper infrastructure be put in place to ensure its successful execution. A country like India cannot transfer to a cashless economy overnight and corruption can also not be avoided just by implementing one scheme. First the right kind of infrastructure has to be put in place so that the transactions across different sectors don’t halt and the economy isn’t as adversely affected as it was in this case. Further, for the digitization of transactions to become the norm it essential that the citizens be gradually pushed to move towards it. Therefore, demonetization in India was a failed Government attempt at bringing a change in the economy in fact it only brought a slowdown in the economy.

 Aparna Kansal

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Author: studentnovasbe

Master student in Nova Sbe

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