6 Years of Demonetisation

In News

A recent survey has revealed that even 6 years after demonetisation, people prefer cash transactions, especially in real estate deals.

Key Findings

  • Purpose of Demonetisation: 
    • The process of demonetisation was conducted six years ago in order to curb the circulation of black money. 
  • Failed Move: 
    • The step has faltered in the long run, as several surveys reveal that despite the Centre’s effort to make a ‘cashless’ economy, currency in people’s hands have only increased in the past six years. 
  • Rise in Cash Transactions: 
    • Digital transactions continue to rise in the economy and yet there is a 44% rise in cash transactions, especially in real estate deals. 
    • The survey has further revealed that 76% people use cash to buy groceries, eat out and get food delivery. 
    • Other common areas of cash usage include home repairs, beauty services.
    • Property transactions emerged as the top area of cash usage from a value per transaction standpoint in the 2021 survey. 
      • 44% of those surveyed who bought a property in the last 7 years said cash was part of the transaction. 
    • One of the other areas where cash use was reported to be high by people in the 2021 survey was for home repairs, salaries of household staff, and beauty services
      • 76% households surveyed also stated that they used cash for groceries, eating out and food delivery transactions in the last 12 months.
  • Testing group: 
    • The survey received over 32,000 responses from citizens located in 342 districts of India. 68% respondents were men while 32% respondents were women. 44% respondents were from tier 1, 34% from tier 2 and 22% respondents were from tier 3, 4 and rural districts. 
  • People using UPI: 
    • The overall universe of people using services like the Unified Payments Interface (UPI) is still 250 million or about a fifth of the population. 

 

Demonetisation

  • About:
    • On 8th November 2016, the Government of India announced the demonetisation of all ?500 and ?1,000 banknotes of the Mahatma Gandhi Series. 
    • It also announced the issuance of new ?500 and ?2,000 banknotes in exchange for the demonetised banknotes.
    • There were three main economic objectives behind demonetisation:
      • Fighting black money, 
      • Fake notes and 
      • Creating a cashless economy by pushing digital transactions. 
  • Outcomes of the exercise:
    • Black money:
      • Among those targets, the biggest one was tackling black money. 
      • Black money refers to cash that is not accounted for in the banking system or cash for which tax has not been paid to the state.
      • According to RBI data, almost the entire chunk of money (more than 99 percent) that was invalidated came back into the banking system. 
      • Of the notes worth Rs 15.41 lakh crore that were invalidated, notes worth Rs 15.31 lakh crore returned.
      • Thus, data suggests that demonetisation was a failure in unearthing black money in the system. Meanwhile, instances of black money seizures continue.
    • Fake Notes:
      • RBI’s annual report, submitted that Rs.15.44 lakh crore worth of currency was demonetised. 
      • The withdrawn money amounted to 86.4% of the currency in circulation at the time. Only Rs.16,000 crore out of the Rs.15.44 lakh crore was not returned. 
      • Only .0027% fake currency was “captured” following demonetisation.
    • Digitisation of economy:
      • As per RBI report, demonetisation has made India a lesser cash-based economy. 
      • In the initial days of trouble conducting business in the face of an acute cash crunch, more and more entities had to shift to digital to do business. 
        • After the return of the cash, the growth in digital payment had been modest.
    • Supported in the Pandemic:
      • The creation of digital infrastructure post-demonetisation helped India in coping with the pandemic. 
      • As the tools for faceless transactions were mostly in place, it became easier to move towards contactless transactions.
  • Major Issues associated with the demonetization exercise:
    • No separate Acts:
      • Demonetisation in 1946 and 1978 were implemented through separate Acts debated by Parliament. 
      • In 2016, it was done through a mere notification issued under provisions of the Reserve Bank of India Act, 1934.
    • Central Bank had rejected key justifications:
      • The Central Board of the RBI gave its approval to the scheme but also rejected, in writing, two of the key justifications — black money and counterfeit notes.
    • Other:
      • 11 crore people stood in queue to change their own money. 
      • Farming community was at a loss. It was sowing season. 
      • Wholesale markets shut down. Prices crashed. Retail saw a “calamitous” drop in sales. 
      • Industry halted and 15 crore daily labourers were left without work.
      • Some say demonetisation broke the back of the rural economy where cash was dominated and disrupted supply chains. 
      • It is estimated that 1.5 million jobs were lost.

Conclusion

  • Many are still to shift or adopt digital payment systems, maybe because it is more convenient to pay cash for purchase of fruits, vegetables or a few items of grocery from a store, or due to other reasons including voucher payment.
  • While there certainly has been a discernible uptick in digital payments, it is doubtful whether the elaborate exercise to unearth black money — the stated and primary goal of demonetisation — was worth it. 

Source: LM