Demonetisation did little to root out black money — RBI

‘IT CAUSED TURMOIL FOR POOR AND MIDDLE CLASS, WHILE RICH FOUND WAYS AROUND SWITCH’

Nearly all of the currency removed from circulation in a surprise 2016 attempt to root out illegally hoarded cash re-entered the financial system, India’s Reserve Bank said, indicating the disruptive move did little to slow the underground economy.

Prime Minister Narendra Modi’s currency decree, which was designed to destroy the value of billions of dollars in untaxed cash stockpiles, caused an economic slowdown and months of financial chaos for ordinary, cash-dependent Indians.

Modi announced in a November 2016 TV address that all 500-rupee and 1,000-rupee notes, then worth about $7.50 and $15, would be withdrawn immediately from circulation. The banned notes could be deposited into bank accounts but the government also said it would investigate deposits over Rs250,000, or about $3,700. The government eventually released new Rs500 and Rs2,000 currency notes.

In theory, the decree meant corrupt politicians and businesspeople would suddenly find themselves sitting on billions of dollars of worthless currency, known here as “black money”.

“A few people are spreading corruption for their own benefit,” Modi said in the surprise night-time speech announcement of the order. “There is a time when you realise that you have to bring some change in society, and this is our time.”

Poor hit badly

But even as the decree caused turmoil for those in India who have always depended on cash — the poor and middle class, and millions of small traders — the rich found ways around the currency switch. In the months after the decree, businesspeople said that even large amounts of banned currency notes could be traded on the black market, though middlemen charged heavy fees.

The Reserve Bank said in its Wednesday report that 99.3 per cent of the $217 billion (Dh797 billion) in notes withdrawn from circulation had been returned.

Some officials had originally predicted that number could be as low as 60 per cent.

“Frankly, I think demonetisation was a mistake,” said Gurcharan Das, a writer and the former head of Proctor & Gamble in India. He said that while it did broaden the country’s tax base, it was a nightmare for the immense, cash-dependent informal economy.

“You can’t overnight change that in a country which is poor and illiterate. Therefore, for me it’s not only an economic failure but a moral failure as well,” Das said.