Short-term pains, long-term gains

Overnight, citizens were left with bundles of devalued notes of Rs 500, and Rs 1,000 - essentially 86% of the money in circulation that had been rendered useless in a heartbeat. 

While the intent behind the note ban was to wipe out black money, bring millions of enterprises into the bracket of the organised sector and push forth the mantra of digitalisation and cashless business, the immediate fallout was borne by the business community, which is largely, and even to this day, a cash-intensive entity. 

Millions of small traders and MSMEs shut shop over subsequent months owing to the unavailability of working capital and liquid cash, which translates as the lifeblood of a business.

One might presume that these hardships, which the PM had summed up as short-term pain for a long-term gain might have after all, transformed India into a cashless society over a span of five years. But that was not to be. 

In 2018, the RBI reported that 99.3% of the demonetised banknotes or Rs 15.30 lakh crore of the Rs 15.41 lakh crore that was demonetised were deposited with the banking system. This had prompted many analysts to summarise that the efforts to rid India of black money hadn’t taken off as planned. The forecast for India’s real GDP growth rate for 2016-17 was cut by 0.5 to 3% owing to the note ban, which also precipitated the loss of 15 lakh jobs. 

Compelling evidence came via a report released this week which said five years post the note ban, the ratio of currency in circulation to the GDP had touched a new peak of 14.5% for the fiscal 2020-21.

The spike was attributed to the pandemic, which further contracted the GDP and shot up the demand for cash. As per RBI data, currency in circulation had surged to Rs 29.17 lakh crore on Oct 29, 2021, from Rs 16.4 lakh crore in 2016.

The increased reliance on paper money is being witnessed not just among cab aggregators in India, but among citizens in First World nations too. The US, Germany, France, Italy as well as Turkey, Russia and Brazil reported an increase in currency in circulation post the pandemic, owing to the cloud of uncertainty. 

Experts believe there is little or no correlation between the currency in circulation and the surge in the penetration of digital payments. While cash in use as a percentage of GDP grew by 5 percentage points, most economies with high e-payment penetration reported that digital payments grew by over 50%.

In India, a silver lining came through indicators that its informal economy has shrunk from 50% to 20% of GDP over the past few years. 

The metric is comparable to that of Europe and considered better than that of Latin American nations where the informal economy could account for as much as 34%. A fall in the detection of counterfeit notes was also seen in India, from 3.1 lakh in FY19, to 2.9 lakh in FY20 and 2 lakh in FY21. India is also leading the way in financial inclusion and has raced ahead of China. 

Mobile and e-banking transactions have risen to 13,615 per 1,000 adults in 2020 from 183 in 2015. The number of bank branches has also hit 14.7 per 1 lakh adults from 13.6 during the same period.

However, this begs the question - did an emerging economy like ours need to be subjected to demonetisation in the first place? With aspirations to touch the $5 trillion stature by 2025, doesn’t it seem counter-intuitive to cripple the backbone that sustains the financial ecosystem? 

The jury might still be out on the net impact of the note ban, but what is certain is that the exercise serves as a cautionary tale on short-sightedness when it comes to governance.