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There has been a hue and cry as far as demonetization is concerned since the night of November 8. Meanwhile, while we were observant of the various developments, we took a decision to wait until the whole story unfolds.Since November 9 , probably each newspaper had published more than 20 articles on the issue. Every erudite in the country , had an opinion about it, moreover every citizen of the country has an opinion about it.

The single move gave a rather  “hungry media” a “giant meatloaf” and they have been chewing on it since then. Every day, and in every form of media, the story of demonetization is unfolding. Some analysis are vary personal and emotional in nature, while some are very rational in nature, some are individualistic and some have broader perspective.

But if you look closely, those who wanted to blame the move, they went on to sight and find cases where due to demonetization “someone” had suffered. Even a Bengali director made a movie about it named- “Shoonyata“, and of course as anticipated the movie shows the problems that unfold when a bride is about to get married and demonetization is announced. The movie is simply individualistic in nature, that means it tries to show the plight of a single bride, and through this the director wants to paint it as everybody’s plight.

So, before we delve into details of demonetization, it is certain that different corners of the society have different opinions about it as they endured the demonetization. To sum up, who are impacted and who are not, here is a rather simplified list :-

  1. Super rich/Rich with legitimate business- No impact or very little impact
  2. Upper-middle class- Not much impact
  3. Middle class-Not much impact beyond the obvious
  4. Neo-middle class- Probably hardest hit, mostly blue-collar workers who lost their job or were unable to be paid by their employer
  5. BPL household- Marginally hit

However, this is a historic move, because, there are no other such decisions which might impact each nook and corner of India and every citizen. Money after all is a basic necessity apart from the usual rhetoric of – “Roti,Kapda aur Makan” (“Food,Cloth and Shelter”)

Being a giant of a decision, it was necessary for us to not give into temptation and publish every article of the newspapers. So, we waited, watched, we observed and now is the time to publish.

History of demonetization:-

In 1971, the Wanchoo Committee had submitted an interim report in which it had recommended, among other reforms, the demonetisation of high-value currency notes. Y B Chavan was then finance minister. Retired civil servant, Madhav Godbole, in his book Unfinished Innings: Recollections and Reflections of a Civil Servant tells us that after many deliberations over the matter, demonetisation was accepted along with other reforms suggested by the committee.

However, “in view of the sensitive nature of the subject and the need for maintaining utmost secrecy”, the prime minister’s approval was needed. So Chavan went to meet Indira. And this is what he told Godbole about his meeting with Indira on the issue.

When Y.B. Chavan told Indira Gandhi about the proposal for demonetization and his view that it should be accepted and implemented forthwith, she asked Chavan only one question: “Chavanji, are no more elections to be fought by the Congress Party?” Chavan got the message and the recommendation was shelved.

Here is the Analysis:-

So, what exactly happened on 8 November?

Prime Minister addressed the nation and announced that effective from 9 November, all Rs 500 and Rs 1,000 notes of the current series (including pre-2005 ones) would cease to be legal tender. That means people could not use them to buy and sell goods and services. Technically, this was not demonetisation, but de-legalisation. The actual demonetisation happened with the proclamation, on 30 December, of the Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016, which reduced those notes to worthless bits of paper.

What does the ordinance do and why was it necessary?

Under Section 34 of the Reserve Bank of India (RBI) Act, 1934, the central bank has a liability to honour every currency note – anyone presenting that note has to get the value printed on it, whether Re 1 or Rs 2,000.  As long as a note does not come back to the RBI, it continues to be a liability.

The only way this liability can end is for the government to expressly state that the old notes cannot be redeemed any more, which is what the ordinance does.

How much of old Rs 500 and Rs 1,000 notes were sloshing around before 8 November? How much has been returned or exchanged?

As of 9 November, the high denomination notes worth Rs 15.44 lakh crore was with the public.

There are various estimates of the money that has come in, based on data from the RBI, but it’s best to wait till the central bank puts out a figure. There could be double counting in the estimates that are going around right now.

Besides, though one will get a pretty accurate estimate in a few days or a week, an absolutely exact figure on notes returned will be known only after some months. Remember, that while the deadline for deposit of the old notes in banks ended on 30 December, resident Indians can still deposit these notes in the offices of the RBI till 31 March and non-resident Indians (NRIs) can do so till 30 June. These are the only two windows given by the ordinance. Resident Indians will have to give a declaration that they were outside the country between 9 November and 30 December.

In addition, people can declare their unaccounted wealth held in cash under the Pradhan Mantri Garib Kalyan Yojana, the second income declaration scheme that was announced on 16 December. The window for this too is open till 31 March. (Some of this could be in new notes, if black money holders have managed to launder the cash they held.)

But the amount returned by NRIs between 31 March and 30 June is not likely to be huge, so it is best to wait till mid-April to get a sense of how much of the demonetised currency has been returned.

Can the window given to NRIs be used to launder large sums of money?

Unlikely. A notification under the ordinance stipulates that the amount of demonetised currency returned by an NRI cannot exceed what is specified under the Foreign Exchange Management (Export and Import of Currency) Regulations, 2015, issued under the Foreign Exchange Management Act, 1999. That limit is Rs 25,000. That’s why the amount returned by NRIs is not likely to be huge.

What is this fuss about my not being able to even keep old notes with me?

The ordinance gives a grace period (31 March and 30 June) for the return of the demonetised currency. So it is not as if you will be penalised for holding old Rs 500 and Rs 1,000 notes between 30 December and 31 March. Beyond this grace period, a person can hold only a total of 10 notes of both denominations (five Rs 500 and five Rs 1,000 or two Rs 1,000 and eight Rs 500, or all 10 of the same value etc) or only 25 notes for study, research or numismatics.

Anyone holding more than this (other than the RBI or anyone ordered to do so by a court in connection with a case) will have to pay a fine of Rs 10,000 or five times the amount of the value of currency found with him, whichever is higher.

Since these notes will be just worthless pieces of paper, what is wrong if I, say, decide to make a collage of 100 pieces and put it up in my drawing room? Or just keep it in my locker and periodically rue the day I decided to evade taxes or make money through crooked means?

Good question, this provision does defy logic. But, no answer. It’s also not clear how the authorities will come to know about people holding more than the specified number of notes beyond the grace period.

Fifty days on, has the inconvenience ended?

The short answer to this is, no, though the situation has improved since the first two weeks post 8 November. Finance Minister Arun Jaitley and RBI governor Urjit Patel have assured that there is enough supply of cash. But all of this is not making its way to banks. The curbs on cash withdrawal have not been rolled back entirely; though the limits for ATM withdrawals have been increased from Rs 2,500 to Rs 4,500 but the weekly withdrawal limit remains at Rs 24,000. There are still ATMs and bank branches with no cash, even in metros. For every story of no inconvenience, there is another of inconvenience and harassment.

Has demonetisation met the objectives it was supposed to achieve?

The jury is still out on this.

In his 8 November address, PM said the move was meant to “break the grip of corruption and black money”.

But black money is a consequence and not a cause of corruption. Merely demonetising high value notes will not eliminate corruption; discretionary power in the hands of the politicians and bureaucrats has to end. This needs a complete recast of governance systems.

The fact that through the past 50 days, there have been seizures of large volumes and value of new currency notes shows that the money-laundering industry has not been hit at all by the demonetisation move. All that happened was that the commission dropped from 40 per cent before the announcement of the Pradhan Mantri Garib Kalyan Yojana to 25 per cent.

Funding of political parties also needs a complete revamp. Political parties are a major conduit for unaccounted money and large cash donations are quite common. Cash donations up to Rs 20,000 need not be reported to the Election Commission and this is a major loophole that all political parties exploit. Nothing has happened to change this.

In his address, the PM also spoke about how fake notes of Rs 500 and Rs 1,000 have been used in terror financing. The new notes have extra security features and were supposed to deal a body blow to the counterfeiting industry. But the seizure of some counterfeiting machines in the past week has raised some doubts about this as well.

UPSCTREE’s understanding of the issue:-

Was it a “bold” move, is there any ethics involved ?

A simple example can clear whether it was a bold move or not. Following India’s demonetization  , another country followed suit, i.e. Venezuela and it resulted in civil war and govt of that country had to roll back the decision.So, in sum, it was a a bold move,  and given the size of the country and 87% transaction being carried out via cash, it was not only a bold but probably an audacious move.It could have been a political disaster and the PM would have no more been the PM- it was that big a risk to take on this “gamble”.The example of Venezuela is testament to it.

So, the next question is why there was no civil war, and this is purely a question of ethics, more specifically virtue ethics.

As per virtue ethics, an act seems ethical because it is carried out by an ethical person.In this case, people don’t judge the act but they judge the actor and form opinions according to it.Given the PM’s persona, people of India, took a leap of faith in the PM, majority were judging the PM than the act of PM.

This is because, there can not be a “Yes and No ” or “black and white” answer to this decision.Some benefits are visible and some benefits will never be visible and same goes for the “bad impacts” as well.It is a indeed a matter of “grey”, however most opinions emanating from different corners of society is either Yes or No.Economists themselves don’t have enough statistics of black economy, so it is worthwhile to ponder how general populace form their opinion and this is precisely the reason why we looked at it from an ethical angel and that gives us some clue of the popular psyche and the way they form the decisions.

Is there any benefit of this decision ?

The PM has a record of being an incremental reformer, but this is a “disruptive” move.The benefit , both short term and long-term are listed below :-


  1. Cost of real estate will come down- making housing affordable.It is indeed a recession like condition for real-estate mafias, and if accompanied  by amendment to Benami Trasaction Act , it will have some real impact in this sector.
  2. Inflation is low
  3. Push for digital-economy
  4. Helps in curbing terror-financing and other threats to state such as Naxalism
  5. A fat deposit in banks may lead to cut in lending rates. It helped in debt-recovery and reduced NPA to some extent


In terms of governance, it helped establish the trust between people and state. For long, the many had the notion that they can get away with illegal means (tax evasion) etc, but this decision established the fact that govt. is willing to go any length to reward good-ones and punish the bad-ones. For long it was other way around, the bad-ones used to garner ill-gotten wealth and managed to get away with it (Just a recall of almost all movies of the last few decades may give the idea, where the good-ones are punished by the wicked , although the good-ones win at the end but that part of the movie was more of a fantasy than reality)

Consider this statistics – 24 lakh people have a declared income of more than 10lakh per annum (24 lakh in a country of more than 120 crore population- is this not tax-evasion?)-this statistics proves that many had such notion of getting away with their ill-gotten wealth. And the decision tries to bridge the gulf of trust deficit between the ruler and the ruled.

Socio-behavioral Impact

This is probably the hardest one to judge. Nevertheless, data shows that online transactions are on a up-swing and rise of more than 200% is evident of it. So this might be the trigger point for Indian economy to go cash-less or less-cash.

Other impacts and harsities are well-known and requires no elaboration.

Was this good decision badly implemented ?

This is indeed the next line of argument put forth by different sections and it has some merit in it. But given the nature of decision and the level of secrecy it required, those who implemented it were probably well aware of it. After all decision of this nature looses steam when it looses secrecy.

However, it could have been better implemented and there should have been an ad-hoc grievance call center set up across the country, where if an organization denies accepting the old notes or a medical denies the treatment to the public deliberately then a complaint should have been registered immediately and action should be taken immediately. This is a giant task , but the  Panchayats and block-development-offices should have been  ideal nodal point to deal with this kind of matter and some form of authority should have been delegated to them with standards of protocol.

The essence is – the state should have to pull all its strings , so that the basic facilities and services are not denied to the general public which requires adequate planning, co-ordination and data-dissemination in real-time. In short, it could have been better implemented.

The next question is whether the black money will be eradicated ?

There can not be any conclusive evidence of it, simply because it is “black” –  that means no one can certainly say how much of it is “black”. However, this decision, although will curb black-money in short term, what it aims essentially is to raise the cost of money-laundering. That acts as a deterrence. When the cost and pain of money laundering outweighs the benefit of it then money-laundering as an act looses relevance.

Moreover, this years budget and tax decision will have impact on this. If the tax is lowered and tax base in increased then govt. will have all the money it wants to run the state and citizens will be least bothered about paying a marginal tax. In short, the govt. has to make tax percentage attractive enough so that money-laundering looses its relevance.So, that is one of the reason why the decision of this nature can not be judged in short-term as many other decision are interlinked with it.

There was demonetization before, so why this one is historic  ?

It is all about timing. Gandhi would not have been Gandhi if he entered India after 1940 or in 1900. Gandhi is Gandhi because of his timing. Same logic can be applied to this decision. The decision before it had no ecosystem of digital payment to support, that means people had not much of alternative. Hence the past decisions had less impact. But this one is perfectly timed. It is the era of digital economy and there is the ecosystem of digital payment and alternative methods to go cash-less , hence important and historic. This will have impact.

So to sum it up, it was good decision, but could have been better implemented. The benefits and demerits are has both short term and long term connotations. Hence, it is wise to wait a little longer and look at the data to see and judge the impact. And there is the budget announcements to be made as well. So , jumping to a conclusion is neither called for nor wise at this juncture.

We all understand certain parts of it, we all don’t understand certain parts of it and nobody knows the exact statistics. And that’s demonetization in a nut-shell thus far.

And yes, there is a last question that went through everyone’s mind though .

Why 2000 rupees notes ?

At first instance one might think this is a moronic move by the govt., but we urge you to think harder. If you look at the data, most of the high value day-to-day transactions lie between 500 to 1000 rupees and by releasing 2000 notes instead of 1000, govt. is deliberately pushing people to do cashless transactions. It is little harder to do retail shopping with 2000 rupees notes and this is precisely govt. is trying to achieve – to give you the note but make it little inconvenient for us to transact. This is much to do with human psychology and less to do with economy. A slight inconvenience leads us to look for alternatives and govt. is trying to tap into this socio-economic-behavior. We wonder, whether the govt. has hired any behavioral scientist to do this. After all there is a whole new world of behavioral economics as well.

Of course, the above one is our interpretation, but if this is what the govt., is trying to do then it is indeed a well-though out move which looks moronic on the face of it.


There are some merit in the decision, however this decision is not aimed at black money only. For the simple reason that  the stock of black wealth held in currency form has been generally estimated at around 5 to 6 per cent of the total black economy.

The stock of black economy does not get affected much and only a small portion of black money is held in currency. Most of it is stashed abroad or held in real estate, gold or foreign currency.  Moreover, black money generation is a continuing process that involves evading taxes, regulations and engaging in corrupt and criminal activities. These cannot be tackled with a one-time measure.

The claim that the demonetisation was aimed at immobilising counterfeit currency also lacks some credibility, because such currency is estimated to value no more than Rs 400 crore, a very small proportion of the value of the high-denomination notes that were in circulation.

There is bound to be arrested growth in economy for short term.

  1. The informal sector is largely cash-dependent and alone accounts for 40 per cent of the GDP and employs 80 per cent of the workforce.
  2. The NBFC are unable to provide loan to small farmers and MSME sectors.
  3. Rupee exchange rates have  increased and there is a downward swirl of stock market.
  4. The state of the economy matters significantly here because that will primarily determine response capacities of each segment, sub-segment and interactions within to influence aggregate outcome.

Some economists put the above arguments to justify that the move was nothing but disastrous. so why did the government go for this move causing much hardship to the common man,the very safety and security of whom the government wants to protect? Did the government take a very myopic step?

A deeper analysis gives a big NO as the answer. Because the sole and underlying motive of the government was TO MOVE TOWARDS A DIGITAL ECONOMY. The subsequent actions of the government bring testimony to this fact:-

a. Discount in digital transactions.
b. Facilitating several methods of digital transaction
c. Circulation of 2000 rupees.

This paradigm shift in the economy will increase the transparency in transactions making the illegal activities difficult and riskier.It will lead to increase in tax base thus reducing tax rate and enhancing the revenue generation.


Note :- This analysis is exclusive to UPSCTREE, and if you have any other alternatives, please do let us know and we can debate and deliberate on this. It took us a while to write this , however we have a strong  belief that it will help you enrich your understanding of this issue. And if you think it is enriching, please don’t hesitate to share.






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