Home > Archives (2006 on) > 2017 > Demonetisation — Demon or a Bitter Pill?

Mainstream, VOL LV No 34 New Delhi August 12, 2017

Demonetisation — Demon or a Bitter Pill?

Saturday 12 August 2017

by Atanu Sengupta and Sanjoy De

An Instant Pill

In the evening hours on a cold November 8, 2016, the de facto head of the Union Government promulgated a new message. A strict restriction was imposed on the use of Rs 500 and Rs 1000 currency notes that were prevalent at that time with a subsequent withdrawal within a few days. It generated disbelief, astonishment and also a barrage of comments. The debates on demonetisation started from that day and goes on unabated to this day.

Going through the current discourse, it appears that there are two brands of thought on this issue. One can be claimed to be the pro-demonetisation view and the other anti. Both these views are not monolithic. The first one contains a huge collection of different ideas, beliefs and arguments that somehow seem to support the official view. The second is again a huge tapestry of opinions (sometimes contradictory to each other) that takes an anti-demonetisation stance. Neither of these two groups is homogeneous or babbling the same repeated rhetoric.

In the complexity of these two sets of opinions, the issue is really interesting and calls for a meticulous analysis. Unless that is done, a mere statement of ‘logical’ arguments either in support or criticism of the issue of demonetisation will remain an empty vessel—‘dialogue of the deaf’. (Thomas Piketty, Capital in the Twenty First Century, 2014, pg. 3)1

In Favour of the Policy

The government has made several claims in favour of the demonetisation move. (Kohli and Ramkumar 2016) Mainly five claims have been put forward by the government in support of demonetisation.

Firstly, demonetisation would help to curb terrorist activities. The argument is that terrorist activities are often financed by counterfeit currencies. Demonetisation seems to cut at the root of this. In this argument, a tactical move has been made to transform an economic policy into a political agenda—in fact an agenda of highest concern for the sovereignty of our country. In effect, there is a transgressionary process of transformation of economic logic to political logic. By this claim, the government, in a way, has cleared its hands on the issues of inefficiency that may emanate in the economic sphere. Anything and everything should be justified at the altar of sovereignty. No one can deny the importance of sovereignty!!??

Secondly, there has been an assumption that demonetisation would help to unearth ‘black money’. By ‘black money’, the government meant the money hoarded in cash unlawfully. It is true that there has been a sizable portion of black money in non-cash forms. However, the dent in at least one form has been made by demonetisation.

This argument captures the popular image of black money in the form of hoarded cash. This point is also quasi-political. In the popular image, black money is a curse to the society. Any policy that can have even a casual assault on the roots of this demonic phenomenon has to be applauded. The happiness that is felt in curbing even a minuscule portion of the strange demon called black money can overstrip the costs and inefficiency involved in the economic accolades that is behind such actions.

The next argument is closely linked with the second one. It says that demonetisation transfers the ownership of cash from the criminals to the worthy possession of the government. The government has declared that the person, who voluntarily discloses, would have to deposit 25 per cent of the undisclosed income into the Pradhan Mantri Garib Kalyan Deposit Scheme (PMGKDS), 2016—the fund that is utilised for various social programmes.

Again, this derived logic is quasi-political and/ or quasi-ethical. It raises the question as to who should own the money—the criminals or the benevolent state? Since most of the poor people get benefits from these social outreach programmes, it is almost automatic that the logic turns into a Robin Hood legend status. Again the economic costs and inefficiency pale into insignificance behind the Robin Hood logic .

The fourth logic is the reduction of interest rate due to the flow of cash from the unearthed black money. It has been stated that there will be an increase in money supply leading to a fall in the rate of interest.

This argument is apparently ‘economic’ in character. A deeper look will help us to clear of this mirage. It has been stated by the government that the banks will be able to provide cheaper loans to the common people once the money from the black market is forfeited. In a poor country like ours, loan is almost a vital part for our existence. It is not possible to carry out many of our day-to-day activities without loan. In such a scenario, cheap and easy availability of credit has a good political appeal.

The last claim for demonetisation is the establishment of a cashless economy. Several policies were adopted that would attract people towards cashless transactions. This logic may apparently look weird. In an economy like ours where cash transaction accounts for over 95 per cent of total transactions, the claim of a cashless economy may appear limited.

However, even here there is a political overtone. In a deeply divided or hierarchical society like ours, people of a particular stratum relate themselves to those who are in his/her close proximity. A poor person may feel elated when he/she sees a slightly richer person is as severely cash-strapped as himself/herself. In an electoral campaign there has been a pick in this situation. A very common anthem may be “Have you ever seen a rich person pampering a poor person for collection of cash on behalf of himself? Demonetisation has empowered the poor.”

The trumpet blows with the logic that trans-cends the ‘rational’ field of economics to the some-what misty atmosphere of political ethics. The rhetoric sounds pleasant and may be acceptable when it comes from the mystic world rather than the harsh reality where people have to live and work.

Against the Wind

The backdrop of the Opposition is motivated mostly by detecting the frailties in the logic provided by the government. The frailties are generally detected in two ways—the non-supportive data to back the claim and the logical inconsistency that is inherent in the government claims. (Sen 2016; Mankar and Shekhar 2017) Both these were directed to the logical aspects of the government’s trumpet-blowing.

The first set can be further sub-divided into—the data insufficiency and data inconsistency. One of the major issues here is the mode in which black money is kept. It has been argued that a very small portion of the black money is kept in cash. (Kumar 2016) People generally keep their deposits in non-cash items. Also a tiny portion of the currency is in counterfeit form or that terrorists have other ways to get their financing. However logical, this argument does not address the ethical-political rhetoric of the government. The common folk are not interested in the magnitude or reach of the policy. At last something has been done to attack the demon of black money—nobody earlier has even tried to do anything even as minuscule as this. Better less than never.

Also, there is very little force in the belief that there will be a huge inflow of cash to the government system. It is highly possible that the government might lose revenue because of the shrinkage in the GDP at least in the short run. This shrinkage may occur due to the shortage in cash supply in the informal sector. “Classroom” Models were built (Dasgupta 2016; Chattopadhayay 2017 ) to understand this issue. The models questioned many of the premises of the government. Again these sophisticated arguments do not touch the common people who talk, debate and vote, who are swayed away by the quasi-political and ethical rhetoric arguments of the government.

It is true, however, that demonetisation has helped to curb the inflation rate to some extent by squeezing the demand. However, in most cases, this squeezing occurs from the poor men’s basket than the rich. This is a strong argument that the government connot deny. Unfortunately this did not appear as a major springboard in the public discussion. At least the government did not allow this to come to the forefront.

The recent data released by the Central Statistics Office (CSO) has created a pinhole in the inflated balloon of the demonetisation hype. The data shows a sharp decline in gross value added (GVA), which is GDP minus net taxes, from 7.9 per cent in the last financial year (2015-16) to 6.6 per cent in 2016-17. The dip has been more succinct in the fourth quarter of 2016-17, where it has crashed to 5.6 per cent. The break- up among the productive sectors makes the picture bleaker. The manufacturing sector’s growth rate has fallen from 12.7 per cent in the fourth quarter 2015-16 to 5.3 per cent in the fourth quarter 2016-17. There has been a fall in private final consumption expenditure from 61.6 per cent during the October-December 2016 quarter to 58.7 per cent during the January- March 2017 quarter of GDP (current prices).

A similar downward trend has been found in the gross fixed capital formation from 27 per cent during the October-December 2016 quarter to 25.5 per cent during the January-March 2017 quarter. The only saving grace is the growth in agriculture but that was abysmally low in the October-December 2016 quarter and is highly dependent on the fate of monsoons.

These dismal figures are undoubtedly a testimony to the frailties in the government logic. Coupled with the recent fiasco of the farmers’ agitation, it seems that the hype of demonetisation has been based on a rather weak ground. However, all these were not known at the time when the Prime Minister made his historic declaration.

What the Ground Says

Debates apart, the promulgation came as an irrevocable and given dictum to the people of the country. Whatever be its analytical or synthetic logic, the demonetisation ‘pill’ had to be digested.

So, this sudden drying up of liquidity forced the people to make several adjustments and even to innovate different ways of transactions. This unprecedented situation compelled many to maintain books, monthly payment system (short-term zero interest loan), exchange of labour, non-digital cash substitutes and even many hidden modes to carry out day-to-day transactions.

Given these innovations by the cash-crunched people, the aim of the government to transform our country into a digitalised transaction system may not be fulfilled. Moreover, different hidden forms of transactions may dent the government’s revenues.


Given all the turbulence, it is clear that the situation after demonetisation is dicey and slippery. The government has tactfully usurped a purely economic agenda into a political and ethical agenda. There are many who take the view from an economic point but that is bulldozed by the majority that hankered on the ethical dimension. The Opposition to this government policy has not been able to counter this Robin Hood logic. In reality, on the other hand, the people have accepted the fait accompli and changed their behaviour in a way that ultimately nullified the original visions of the government of pushing up a digitised economy. What remains of the trumpet is an empty dream that rolls in an autistic world. But as Marx said long ago, “Religion is the sigh of the oppressed creature, the heart of a heartless world, and the soul of soulless conditions. It is the opium of the people.” (Marx, K., 1976, Introduction to A Contribution to the Critique of Hegel’s Philosophy of Right, Collected Works, v. 3. New York) Empty dreams are the heart of the heartless world too.


Chattopadhyay, Soumen (2017): “Black Economy and Demonetisation”, Economic and Political Weekly, Vol 52, No 20.

Dasgupta, Dipankar (2016): “Theoretical Analysis of ‘Demonetisation’”, Economic and Political Weekly, Vol 51, No 51, pp 67—71.

Kohli, V. and R. Ramakumar (2016): “Economic Rationale of ‘Demonetisation’”, Economic and Political Weekly, Vol 51, No 53.

Mankar, R. and S. Shekhar (2017): “Demonetisation and the Delusion of GDP Growth”, Economic and Political Weekly, Vol 52, No 18.

Kumar, Arun (2016): “Estimation of the Size of the Black Economy in India, 1996—2012”, Economic and Political Weekly, Vol 51, No 48, pp 36—42.

Sen, Pronab (2016): “Demonetisation is a hollow move”, Live Mint, November 17, http://www.livemint.com/Opinion/uzvIE84KGXy1xvp06pTazM/Demonetization-is-a-hollow-move.html.


  • Piketty (2014) in his book discusses what happens when there are debates based on individual beliefs. He categorically argues that ‘each camp justifies its own intellectual laziness by pointing to the laziness of the other...’

Atanu Sengupta is a Professor, Department of Economics, Burdwan University, Burdwan (West Bengal). Sanjoy De is a Research Scholar, Department of Economics, Burdwan University, Burdwan (West Bengal).

ISSN : 0542-1462 / RNI No. : 7064/62 Privacy Policy Notice Addressed to Online Readers of Mainstream Weekly in view of European data privacy regulations (GDPR)