2016 Indian banknote demonetisation
On 8 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 ₹2000 banknotes in exchange for the demonetised banknotes. Prime Minister Narendra Modi said that this decision would curtail the shadow economy, increase cashless transactions and reduce the use of illicit and counterfeit cash to fund illegal activity and terrorism.
The announcement of demonetisation was followed by prolonged cash shortages in the weeks that followed, which created significant disruption throughout the economy. People seeking to exchange their banknotes had to stand in lengthy queues, and several deaths were linked to the rush to exchange cash.
According to a 2018 report from the Reserve Bank of India ₹15.3 lakh crore of the ₹15.41 lakh crore in demonetised bank notes, or approximately 99.3%, were deposited in banks, leading analysts to state that the effort had failed to remove black money from the economy. The BSE SENSEX and NIFTY 50 stock indices fell over 6% on the day after the announcement. The move reduced the country's industrial production and its GDP growth rate. It is estimated that 1.5 million jobs were lost. The move also saw a significant increase in digital and cashless transactions throughout the country.
Initially, the move received support from some central bankers as well as from some international commentators. The move was also criticised as poorly planned and unfair, and was met with protests, litigation, and strikes against the government in several places across India. Debates also took place concerning the move in both houses of Parliament.
The consensus is that demonetisation was not the right move to target black money, and was unsuccessful. Moreover, it was based on an incorrect understanding of what constitutes black money.
Background
The Indian government had demonetised banknotes on two prior occasions—once in 1946 and once in 1978—and in both cases, the goal was to combat tax evasion via "black money" held outside the formal economic system. In 1978, the Janata Party coalition government demonetised banknotes of, and, again in the hopes of curbing counterfeit money and black money.In 2012, the Central Board of Direct Taxes recommended against demonetisation, saying in a report that "demonetisation may not be a solution for tackling black money or shadow economy, which is largely held in the form of benami properties, bullion and jewelry." According to data from income tax probes, black money holders kept only 6% or less of their wealth as cash, suggesting that targeting this cash would not be a successful strategy.
Demonetisation process
Preparation and announcement
The plan to demonetise the and banknotes was initiated between six and ten months before it was a report by the State Bank of India analysed possible strategies and effects of demonetisation. In May 2016, the Reserve Bank of India had started preparing for new banknotes and confirmed the design of banknotes in August 2016. The printing of new banknotes started in October when the news stories of forthcoming new banknotes appeared in the media. On 27 October 2016, the Hindi daily Dainik Jagran published a report quoting RBI sources speaking of the forthcoming of banknotes alongside withdrawal of and banknotes. On 21 October 2016, The Hindu Business Line had also covered a story on demands to withdraw the banknotes to prevent hoarding of black money.The Board of the Reserve Bank of India met on 8 November 2016, 5:30 PM to consider a letter from the Ministry of Finance regarding demonetisation. "Two key reasons for the proposal cited in the government letter were: between 2011 and 2016, the supply of 500- and 1,000-rupee bills had grown by 76 and 108 percent, respectively, while India's economy had only grown by 30 percent during this period; and cash typically facilitated "black money." The board was further told that the measure was also intended to encourage greater financial inclusion and to incentivise greater digitisation of the economy. The board approved the proposal, but not before making a few trenchant comments. It noted that the measure may not have the desired effect on black money because most people do not hold undeclared wealth in cash. It further worried about the negative effects on growth that were likely to occur in the short run. Possibly the most damning observation was that the primary fact on which the government had based its proposal—that the supply of 500- and 1,000-rupee bills had far outstripped the growth rate of the economy—was simply wrong. The board pointed out the embarrassing fact that the government had compared GDP growth in real terms with the growth of currency supply in nominal terms. In fact, nominal GDP growth had summed to over 80 percent between 2011 and 2016 and hence was in line with the growth of the currency bills to be demonetised."
The Union cabinet was apprised of the plan on 8 November 2016 in a meeting in the evening convened by Prime Minister Modi. Soon after the meeting, Modi announced the demonetisation in an unscheduled live national televised address at 20:15 IST. He declared circulation of all and banknotes of the Mahatma Gandhi Series as invalid effective from the midnight of the same day, and announced the issuance of new and banknotes of the Mahatma Gandhi New Series in exchange for the demonetised banknotes.
Information leak rumours
After the announcement of demonetisation, a prominent businessman claimed to have received prior tip-offs and rumours warning of the move and after seeing leaked photos of new notes "knew what was coming", allowing them to preserve their money by converting it into smaller denominations. A Bharatiya Janata Party member from Rajasthan Legislative Assembly, Bhawani Singh Rajawat, claimed in a video that wealthy businessmen were informed about the demonetisation before it occurred. He later denied making the comments.Cash exchange and withdrawal
The Reserve Bank of India stipulated that the demonetised banknotes could be deposited with banks over a period of fifty days until 30 December 2016. The banknotes could also be exchanged for legal tender over the counter at all banks. The limit for such exchange was per person from 8 to 13 November, was increased to from 14 to 17 November, and reduced to from 18 to 25 November. The exchange of banknotes was stopped completely on 25 November, although the government had previously stated that the volume of exchange would be increased after that date. International airports also facilitated an exchange of banknotes for foreign tourists and out-bound travellers, amounting to a total value of per person. Fuel pumps, government hospitals, railway and airline booking counters, state-government recognised dairies and ration stores, and crematoriums were allowed to accept the demonetised banknotes until 2 December 2016.Cash withdrawals from bank accounts were restricted to ₹10,000 per day and per week per account from 10 to 13 November. This limit was increased to per week from 14 November 2016. Limits on cash withdrawals from Current accounts/ Cash credit accounts/ Overdraft accounts were withdrawn later. RBI increased the withdrawal limit from Savings Bank account to from the earlier on 20 February 2017 and then on 13 March 2017, it removed all withdrawal limits from savings bank accounts.
A daily limit on withdrawals from ATMs was also imposed varying from per day until 14 November, and per day until 31 December. This limit was increased to per day from 1 January, and again to from 16 January 2017. From 17 November, families were allowed to withdraw for wedding expenses. Farmers were permitted to withdraw per week against crop loans.