Wednesday, November 8, 2017

Demonetisation - What did we gain?

Prime Minister Narendra Modi announces
Demonetisation on Nov 8, 2016 at 8pm
On 8th November 2016 when Prime Minister Narendra Modi announced Demonetisation, some of us followed it up with long telephone calls, running upto midnight, calling this a bold move and a masterstroke from Narendra Modi. Not for a second was there a doubt about this. We thought it was a fantastic move which was very much needed in this country. And this was the very first reaction.

The Tweet from @PMOIndia at 4:21 PM
on November 8, 2016
Curiosity was building up since evening when a photograph of Prime Minister with Army and Navy Chiefs, Vice Chief of Air Staff & National Security Advisor, was released by the PMO's twitter handle. This was followed by a sudden meeting with the President of India and then with the Cabinet. Then came announcement of PM's address to the nation. We all anticipated something big is going to come up. But none thought of Demonetisation.

Over the next few days, as execution of Demonetisation came into action, I began to reflect on the gap in massive implication of this policy and totally lackadaisical nature of its execution. I thought Prime Minister was just making a public comment that this impending exercise was not known to anyone and that in reality all Banking Systems, Vigilance bodies etc would be ready to get the program rolling. But unfortunately, Prime Minister was speaking the truth. There were indeed only a handful of people who were in the know of this pending move.

But the great thing about Modi Sarkaar has been its ability to work in a dynamic response-based environment. As feedback comes the Govt makes changes to its stance and thereby manages to calibrate the effect of any weaknesses in the original move.

A great effect of Demonetisation for me, personally, was that I started to look into RBI Data again, after a gap of 18years. As an Economics Graduate, and a very active one at that I used to run through RBI Bulletins and Occasional Papers on various aspects, in those days effect of Deregulation of Indian Economy was the key interest.

I have watched Demonetisation quite closely. Not only did I spend time crunching RBI’s own data, I also maintained contact with Govt Employees, CAs, Businesspersons from MSME segment and other professionals whose industries are given to large-scale cash-based corruption. And as we complete one year of Demonetisation and as everyone will bring their own piece of review, I thought it would be good if I too used the occasion to express my opinion on the subject. I have planned to do a series of blogs to review this massive exercise.

Lets go straight to the benefit of demonetisation. This is what everyone is more eager to know. We’ll discuss other issues later.

Biggest gain of Demonetisation

Demonetisation was a festival.
A celebration of victory of White over Black.
Forget data. Forget the data on achievement of 5 goals given by Modi Sarkaar for Demonetisation. People can always argue against the data based on their bias. The biggest gain of Demonetisation cannot be measured in numbers.

Many people are bruised by demonetisation, some may be fatally injured as well. But yet BJP is winning elections, people are backing Govt. and the data cannot tell you why this is so. Look beyond data.

The biggest gain of Demonetisation is mindset change. The fear of long arm of law. The difficulty a willing leadership can put defaulters into. The length that the Govt can go to. Today no tax evader, no corrupt babu is certain about the extent to which the Govt will go to punish the offenders. People may still be indulging in these offences, but the restlessness has increased and then number of people who have the heart to tolerate such restless are lower. Today, if Prime Minister's address to the nation is announced, people begin to worry what new anti-corruption measure are going to get announced. Tells you a lot about mindset change.

People respect the Govt., because they believe Govt. has done what it was always supposed to do. Give a hard time to those who indulge in Economic Offences. You’ll be surprised to know that even the offenders respect it. Many indulged in it because that is what the environment prevailing prior to Demonetisation demanded of them. But now there is a promise of transparency, accountability, level playing field for all the players in the business.

Narendra Modi has, in a single stroke, exhibited what a Prime Minister’s power is. Prime Minister never needed new Laws. Prime Minister only needed a Spine.

People are in difficulty, they will complain about it, but that is only to force the course correction on execution by inviting the attention of the Govt. Even the mother needs the child to tell her that he is hungry.

And let me tell you one thing, this is now a personal relationship between Narendra Modi and the people. It is THIS man in the chair of Prime Minister who has shown the Spine. And hence, it is THIS man that people will go the extra mile for. Any lesser mortal will fail to elicit similar response.

India’s Reputation for Clean Business Internationally

The world respects India a lot more today and Govt of India even more. Many Govts worldwide have considered Demonetisation but none have guts. Nobody thought their citizens will cooperate and everyone worried about elections. We should remember that Venezuela declared Demonetisation in the same period as India and the backlash was so heavy that they had retract the policy.

In India, not only did the public cooperate, but BJP went on the win UP Assembly Election. It is symbolic of the level of faith Prime Minister Narendra Modi enjoys in Indian Democracy. Leaders world over know the net worth of their popularity in their country’s democracy and, therefore, understand the position of strength from which Narendra Modi leads India internationally. Moreover, to international businessmen, the intent of the Govt has become clear. They know that this Govt means business. The gain from this, is going to be tremendous. Diplomatically, National Security wise, and International Businesswise, expect a major jump over the coming few years.

After BJP wins 2019 General Elections, the position of Narendra Modi will be bolstered so strongly, that I expect Donald Trump or Vladimir Putin or Xi Jinping to show tremendous respect to Indian Prime Minister and change the game on the negotiating tables worldwide.

Other Gains

Digital Transactions
Digital Transactions in the form of IMPS transactions has received a very solid push from Demonetisation. It created the correct atmosphere for its launch and delivered the objective flawlessly.

IMPS stood at Rs.32,500cr for the month of November 2016. It has reached Rs.75,000cr for the month of October 2017. That is a whopping 130% jump in monthly transactions alone. For the year 2016-17, IMPS data stood at Rs.4.11 Lakh Crore. For the year 2017-18, it already stands at Rs. 4.47 Lakh Crore upto Oct 31, 2017 and I estimate it should clock another Rs.3.5 Lakh Crore, at least, in the remaining 5 months of 2017-18. That will be a huge 94% jump year on year.

 Tax Base

Notwithstanding Govt claims on current increase in Tax Base, the mere Bank Deposits made at the time of Demonetisation are bound to increase the Tax Base of India. That number may be minuscule but the Tax Base in India has been so minuscule for years that this will have significant effect in Tax Collection in near future. Also, the fear factor, that the Govt is strict, is going to ensure not only higher compliance from existing base, but submission of complete tax evaders to the Taxation system and therefore cause an increase in Tax Base. But yet, in terms of data at least, I don’t want to rely on any numbers at this stage. Common sense and Govt action clearly indicate this push.

Having said that, Govt has to do lot more to increase tax base. But we leave that discussion for the Policy Pundits.


Demonetisation was surely not an exercise for the heck of it. A massive exercise can have massive failures too. But it can have massive gains as well. Numbers give a fleeting image of things. They are not going to tell you much. Read people’s mind, their attitude and the change in behavior.

In the next piece, we shall discuss Impact on Businesses.


  1. Nice article and good/valid points

  2. I am looking forward for nxt blog. Like the way you articulated the point.