Demonetisation: Truth Vs Hype [Part I]

This is the first of a two part series on Demonetisation.

Many economists and Nobel laureates have propounded their view on the issue, many a times more of a rhetoric than pure reasoning. Reading all those comments, speeches by someone renowned for his qualification in economics and skills in administration, such as Dr Manmohan Singh, calling the exercise as an organized loot and legalized plunder, make me laugh and wonder whether an economist of his status would stoop down such a level of political jingoism far away from the facts.

I am reminded of a story where a group of blind men attempted to describe an elephant!



Everyone is bound to argue that he is right, but the truth is not right in entirety the true picture is different from perception when you view it in totality. Invariably many have been eager to vent out their personal opinions, often not supported by research, past / present data, facts and figures.

I am not an economist and not affiliated to any political party. Instead of explaining the logics, I shall start addressing the claims by pundits of the adverse effects and unpreparedness etc., and disprove them one by one with facts and figures.


1.   India's per capital income rose by 7.4 per cent to Rs 93,293 in 2015-16, compared to Rs 86,879 in the preceding fiscal, government data showed today. [1]



2.   As of Nov 2016, India is the second-most unequal country in the world.  The richest 1% of Indians own 58.4% of wealth. The richest 10 % of the Indians own 80.7 % of the wealth. This trend is going in the upward direction every year, which means the rich is getting richer and the poor is getting poorer. [2]

Understanding the above two statistical numbers, we can infer the so called poor people of India earn far less than the average of Rs 93,293/- or a monthly income of less than Rs 7,750. Let us understand that it is not their savings but income. After providing for their living how much money would be left with in their hands at any point of time and that too in Rs 500 and Rs 1,000 denominations? Hence the poor are stranded with old currency in their hands could well be unfounded. We all know that the poor of India do not use cash as store of value; they convert it into livestock or gold. The so called poor might have had a couple of notes which they could have exchanged in the window of time provided for exchange.

The immediate question is the big queues at the banks and ATMs. The point to be noted here is that the currency exchange queue surprisingly vanished once the indelible ink came into picture. The correct fact is that the exchange window was exploited by the black money hoarders using the so called poor as mules. Our gullible population was very happy to do the service for a small crumb that might have been thrown at them. Now the majority of the queue is on account of conversion of black in to white by hawala agents. In my opinion government should stop accepting old currency at banks and leave it to RBI only.


Currency in circulation as on 8-11-16 has been furnished in the table below. I have used the numbers presented at the parliament on the high value currencies as at 8th November and correlated with the published figures of RBI as at 11-11-16 (Reserve money components).



Money taken out of system by demonetizing the old 500 and 1000 notes was Rs 15.44 trillion. If I look at the RBI’s report of money in circulation as at 18-11-16 total reserve money supply is 14.269 trillion as against 17.877 trillion as at 11-11-16. Implies that the net money sucked out of the system is just 3.60 trillion only.

It should be noted that the Finance Minister Mr. Arun Jaitley, during his interview at HT Leaders summit, has stated that the entire money that has been demonetized will not be remonetized, certainly providing for the increase in use plastic money, e-wallets, online transactions and also black wealth that might have been eliminated from the system. With the above numbers of just 3.6 trillion effectively sucked out of the system, I tend to confirm that RBI has provided adequate money supply in the economy, which would be quite sufficient to sustain normal economic activities.

Theoretically there should not be any adverse impact on the economy or GDP as feared by many so called pundits and scholars, on account of withdrawing Rs 3.6 trillion worth of currency from the system because:

1.   Increase in use of Rupay cards is over 118%[3], debit and credit cards by over 70% (means cash transactions are being replaced by card transactions), in the first week of demonetization. A point to be noted is that there has been a substantial increase in POS transactions not just ATMs, which implies that the people are doing commercial transactions and not just cash withdrawals.

2.   Also out of the Rs 15.5 trillion that has been demonetized, Rs. 8.5 trillion has been deposited into the bank accounts (From the statement of Mr. Arjun Ram Meghwal in parliament and RBI money supply date as at 11-11-16) and Rs 2.16 trillion has been withdrawn, implying that the cycle of in and out from the banks has started. The difference between the deposits and withdrawals which is approximately Rs 5 trillion would be the additional deposit with the banks.

Data on currency exchange and deposit (In Rs. crores)


3.   Another unsung hero is the increase in domestic savings deposited on account this demonetization, which is over Rs 5 trillion as of writing this report, which is equal to approximately USD 73 billion. So much money will be available to the banks for further lending thereby spurring an unprecedented economic growth. We always crave for FDIs which was the highest in the FY 16, totaling USD 55.4 billion. In contrast to that in just two weeks Indian public have brought in funds worth USD 73 billion to the banking system. The move has unleashed the unutilized internal wealth.

4.   One key indicator that has been showing a steady increase over past decade in India is the bank deposit to GDP ratio. From around 45% in the year 2001 it has grown to 71% in the year 2016[4]. Hence increase in bank deposits would have a direct impact on the GDP growth of India.

5.   Even though there are no clear numbers to support my argument, the loss of GDP that is expected on account of such demonetization exercise, could well be compensated by the hitherto uncaptured GDP data / cash economy data which would now be captured on account of online / card transactions.

6.   Rs 3.6 billion which has effectively been sucked out of the monetary system is just 25% of the total old value of 500 and 1000 denominations, which is more or less equal to the black money hoarded and kept as currencies as per best estimates. (My estimate corroborates closely with the assessment done by India times in its article which places the black money sucked out of the system to be at Rs 4 trillion). [5] There is no valid proof for this claim that the hoarded black money is 25%, even though it has been widely spoken and accepted number, but would be validated on 30th December when final numbers will be available. So in theory the cash notes that have been demonetized have been replaced in a week, the question is has it reached the last mile?

7.   Elimination of fake and counterfeit currency.

AAEAAQAAAAAAAAhrAAAAJDk2YWMxMDlmLTU4MTMtNDcyYy04N2MzLTE4NjJjYmVlYmZmYg Source: Reserve Bank of India; Note: Assuming number of Rs 2 and Rs 5 notes to be equal

The above table represents the fake currency detected and reported in the system during the last financial year, a point to be noted is that just three banks Axis, ICICI and HDFC reported 80% of such counterfeit notes, which implies that such notes are not detected fully in other banks. A data from Indiaspend reports that the only 6 out of every 250 fake currency is reported. Going by that percentage the estimated fake currency that would have been eliminated would be Rs 1.2 trillion.

Adding it up with anticipated 3.6 trillion black money, the total counterfeit and black money that would have been eliminated would be Rs 4.7 trillion.

8.   Several key sectors such as cement have shown rebound in the growth after an initial impact for about a week. Rabi sowing has been 8% more than the previous year implies that the rural India has not been hit as badly as propagated in the news media (Speech by minister of coal Mr. Piyush Goel at the HT Leadership summit).

9.   If not anything else, the move has improved the tax collection of all civic bodies across India. Municipalities, metropolitan corporations, and other civic bodies have reaped a higher tax collection[6] post November 8th.


A summary of above mentioned points would indicate that there may not be any adverse effects on the economy and GDP, rather there would be growth of GDP.

The article was originally published on LinkedIn.  

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