Demonetization in India: Uncovering the Enigma

Abstract

The demonetisation in India, announced on 8th November 2016, was one of the rare and bold actions taken by the government of India to curb the menace of black money, counterfeit currency, and corruption. The execution faced many hiccups in the initial days following the announcement. With 86 percent of the currency in circulation made invalid and with fresh currency available only in a small tranche during the 50-day window of exchange, the people of India faced several hardships. Though this was not the first time India executed demonetisation, the scale and environment were completely different. Demonetisation affected all sectors of the economy, but the agricultural sector and the small and medium enterprises sector were the hardest and quickest to get hit by it. The one winner that emerged in the short run were the banks. The sudden rise in deposits created a large surplus which boosted the banks’ returns significantly. The medium term effect of demonetisation was realized by the increase in the overall tax collection. Moreover, there was also a trend towards digital payments. With critics claiming it a big failure and government citing it as a complete success, and the truth lying somewhere in between, the demonetisation of 2016 remained an enigma.