14 Oct 2022  |   05:29am IST

Who profited from demonetisation?

The Central government in 2016 unexpectedly and abruptly announced the demonetisation of Rs 500 and Rs 1,000 banknotes and issued the new notes of Rs 500 and Rs 2,000.
Who profited from demonetisation?

The rulers patted themselves on the back claiming that they had curtailed the black money and the money used to fund illegal activities such as terrorism. The consequences of the move followed.

The common men had to wait in lengthy queues in front of banks and ATM machines like beggars to deposit their old notes and to withdraw the cash. Several deaths were alleged to have taken place due to the rush to exchange cash; however, one will have to accept that the demonetisation took a huge toll on the people. The decision which was implemented without any forewarning left a huge dent in the rural economy. It would be afternoon by the time the village people would reach the cities to exchange their old notes and sometimes had to go back without completing the task as they had to catch the last bus going to their village. In a dilemma whether to go to work or to deposit the old notes, some had to even get rid of their notes.

The case of demonetisation has now reached the Supreme Court. The Apex court has asked the government and RBI whether the move achieved its objectives. A five-judge bench headed by Justice SA Nazeer has asked Union, RBI to file comprehensive affidavits by November 9 asking under which law they had exercised the note ban. As per the petitioners, Section 26(2) in the Reserve Bank of India Act does not grant any right to the government to entirely nullify notes of a particular value. Section 26(2) gives the right to the Union to demonetise the whole currency notes or a particular series of the currency notes, to which the government and RBI will now have to answer.

The BJP-led central government on November 8, 2016 decided to take back 85% of the currency notes and a ban on the notes with denominations 500 and 1,000 was announced overnight. The decision has completed almost six years but the people have not forgotten about the demonetisation. The decision created a significant disruption throughout the economy, especially in the rural areas where all the trades and businesses are run in cash. In India, it's still very common to keep cash at home in case an emergency arises. The people in rural areas are still not used to the idea of health insurance and heavily rely on the cash in hand. They did not understand how to answer where the money came from. Some had arranged to get new notes by thinking that if they deposit demonetised notes up to 2.5 lakh in their bank accounts then the government would not question them. The government had stated at that time that the demonetisation was to bring back the black money and to act against unaccounted wealth. Six years on, and nobody seems to know the definite results of the move. 

It was also said that the decision would help to make the country's economy go cashless. It is not clear whether the government was able to recover black money, however, the decision might have helped to collect the taxes.

It is also true that there has been a reported increase in digital transactions. Nevertheless, people still do not walk out of the house without keeping notes in their pockets. The situation was chaotic and confusing when the decision was announced. There were new notes available in the banks in exchange of banned ones although the limit was of just Rs 4,000 and that too for a limited period. The abrupt decision and its poor execution have only affected the poor from the rural areas and the stories of them continue to come out. The government's intention was to bring back the black money from abroad which according to them was a reason behind corruption and illegal activity. The government was also of the opinion that this money does not come under the tax revenue. 

The note ban has not changed this situation still. In fact the ones who legally owned cash in large amounts had to suffer while exchanging them. According to a report published by RBI in 2018, 99% of the demonetised banknotes had been deposited with the banking system which gives enough scope to claim that the government's intention behind the move suffered a humiliating defeat. The government has not yet officially accepted their trouncing and it will be crucial to see which strategy they adopt for their defence in the Supreme Court.


Idhar Udhar