The most effective response to: why did demonetization fail in India?

Demonetization in India failed due to several reasons. The sudden withdrawal of high-value currency notes led to severe cash shortages, negatively impacting the economy and causing distress to the common people. Additionally, the expected benefits such as curbing black money and reducing corruption were not adequately realized.

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Demonetization in India, which refers to the sudden withdrawal of high-value currency notes, was a significant policy move aimed at curbing black money, reducing corruption, and promoting a digital economy. However, it is widely believed that demonetization failed to achieve its objectives and instead had several negative consequences for the country.

Based on my practical knowledge and observation, demonetization failed in India due to the following reasons:

  1. Severe cash shortages: The withdrawal of 86% of the country’s currency in circulation created a massive shortage of cash. People faced immense difficulties in accessing their own money, leading to long queues outside banks and ATMs. This cash crunch adversely impacted various sectors of the economy, particularly agriculture and small businesses.

  2. Economic slowdown: The sudden withdrawal of cash disrupted various economic activities, causing a slowdown in growth. The informal sector, which heavily relies on cash transactions, was hit hard, resulting in job losses and a decrease in consumer spending. The impact on the rural economy was particularly severe, as a majority of transactions in rural areas are conducted in cash.

  3. Negligible impact on black money: The expectation was that demonetization would flush out black money, but the actual results were far from satisfactory. While some unaccounted cash was unearthed, the majority of black money holders found ways to convert their illicit wealth into other assets or foreign currency. According to a report by the Reserve Bank of India (RBI), more than 99% of the demonetized currency came back into the banking system.

  4. Disruption to businesses and trade: Small and medium-sized enterprises, which heavily rely on cash transactions, were adversely impacted by demonetization. Due to a shortage of cash, many businesses faced challenges in carrying out daily operations, paying wages, and procuring raw materials. The disruption in trade cascaded through supply chains, leading to job losses and economic instability.

  5. Inconvenience to the common people: The sudden demonetization resulted in ordinary people struggling to meet their daily needs. Access to essential goods and services became challenging, particularly for those residing in remote areas or with limited access to banking facilities. The move disproportionately affected the marginalized and economically vulnerable sections of society.

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Despite the intended benefits, the negative consequences outweighed the positive outcomes of demonetization. In the words of renowned economist Amartya Sen, “Demonetization imposed an extraordinarily high cost on society in terms of human suffering. It cannot be thought of as a simple shock therapy.”

Interesting facts on demonetization in India:

  1. The demonetization announcement was made by Prime Minister Narendra Modi on November 8, 2016, providing a window of 50 days to exchange or deposit the demonetized currency.
  2. The demonetization move sought to combat counterfeit currency, terrorism funding, money laundering, and tax evasion.
  3. India has a substantial cash-dependent economy, with cash accounting for around 80% of all transactions.
  4. The Indian government introduced new currency notes of ₹500 and ₹2,000 denominations as a replacement for the demonetized ₹500 and ₹1,000 notes.
  5. The long-term impact of demonetization on the Indian economy is a subject of ongoing debate among economists and scholars.

Table: Impact of Demonetization in India

Consequences Description
Cash shortages Severe scarcity of cash leading to long queues, hampering economic activities.
Economic slowdown Disruption of businesses, decline in growth rate, and job losses.
Negligible impact on black money Failure to unearth a significant portion of illegal or unaccounted wealth.
Disruption to businesses Struggles in carrying out daily operations, payment difficulties, and supply chain disruption.
Inconvenience to the common people Difficulties in accessing essential goods and services, affecting the vulnerable sections of society.

In conclusion, demonetization in India failed to achieve its intended goals and instead resulted in severe cash shortages, economic slowdown, and inconveniences for the common people. The move had negligible impact on curbing black money, and its consequences imposed a significant cost on society.

Watch a video on the subject

In this YouTube video titled “Demonetization: Final Analysis of the Masterstroke by Dhruv Rathee [UPDATED],” the speaker, Dhruv Rathee, presents a comprehensive analysis of demonetization and its implications. Rathee highlights that demonetization failed to uncover significant black money, as 99.3% of demonetized currency was returned to banks. He also contends that it had no impact on fake currency or terror funding, which continued even after the policy. Additionally, while there was a temporary increase in cashless transactions, it ultimately returned to pre-demonetization levels. The speaker acknowledges an increase in taxpayers and direct tax collection but argues that this cannot solely be attributed to demonetization. Rathee criticizes the government for misleading claims, economic losses, and the spread of fake news. Overall, demonetization is portrayed as heavily negative, with a rating of -10 for its advantages and disadvantages.

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The poor and the lower middle-classes that constitute the vast majority of the population, simply did not have the access to structural and cultural resources needed to adapt to such shock economics.

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Why India demonetization failed?

“Demonetisation was supposed to reduce black money by reducing cash in circulation. However, after the demonetisation, the cash in circulation has continued to rapidly grow. Even relative to the size of the economy, i.e. the ratio of cash to GDP has grown from 8.7% in March 2017 to 13.7% in March 2022.

Did demonetization fail in India?

Answer: “This ill-conceived and poorly implemented measure has dealt a massive blow to the vibrant economy of our country. Several studies by both government and private institutions in the past six years prove beyond doubt that demonetization has failed on all accounts,” KTR said.

What happened to demonetization India?

A little more than six years ago, on November 8, 2016, the Indian government had introduced the new Rs 2,000 currency notes following the demonetisation of the old Rs 500 and Rs 1,000 banknotes as a step against accumulation and circulation of black money in the country.

What was the biggest disadvantage of demonetisation?

Disadvantages of Demonetization

  • Causes Panic Among the Public. Canceling the legal tender of currently available money is disturbing news for the common public.
  • Halt in the Economic Development.
  • Recalibration of ATMs.
  • Causes Liquidity Crunch.
  • Short-term Downfall in the GDP.
  • Payment Crisis.

How did demonetisation affect Indian economy?

More than 105 people had died in the post-demonetisation rush for cash across the country. Demonetisation also hit small-scale businesses. According to the Centre for Monitoring Indian Economy (CMIE), demonetisation caused loss of about 15 lakh jobs.

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Is Demonetisation a failure?

Fiscal conservatism remains the dominant narrative and has inhibited the post-2008 recovery in Europe. Similarly, the demonetisation of high-value currency in India in 2016 is a classic example of policy based on faulty narratives. How demonetisation was a failure? Disruption: The demonetisation in 2016 caused widespread disruption in the economy.

Why did Modi announce a demonetisation initiative?

In a televised address, Prime Minister Narendra Modi had announced the demonetisation initiative at 8 pm on November 8, 2016 to fulfil four objectives of checking terror-funding by Pakistan, printing of counterfeit currency, black money and corruption.

Why did Manmohan Singh call demonetisation a’monumental mismanagement failure’?

Answer to this: Former prime minister Manmohan Singh had called the demonetisation drive as a “monumental mismanagement failure”. He had warned that GDP growth could fall by 2 per cent and it would hurt agriculture, small industry and everyone in the unorganised sector.

Did India pay a huge price for demonetisation?

As an answer to this: Soon after the RBI released its annual report, former Finance Minister P Chidambaram launched a fresh attack on the Modi government saying that the country paid a huge price for demonetisation by way of job loss, closure of industries and the GDP growth. "Indian economy lost 1.5 per cent of GDP in terms of growth.

Did demonetisation fail?

Unfortunately, it seems to have failed in both aspirations. Even though the main stated aim of demonetisation was to curb the extent of black money in the economy, during the first two months of the drive, almost 90% of the scrapped and demonetised notes were back in the banking system.

Why did India announce a demonetisation of all banknotes?

As an answer to this: (Express Photo by Kamleshwar Singh) Six years ago, on this day, November 8, the Government of India announced the demonetisation of all banknotes of Rs 500 and Rs 1,000, as a step against accumulation and circulation of domestic black money.

What did Rahul Gandhi say about demonetisation?

As an answer to this: Six years later, Congress leader Rahul Gandhi, in a tweet on Monday, attacked the move implemented by the BJP-led government in the country. He wrote, “In demonetisation, the ‘Raja’ did the DeMo-lition of the economy with the promise of ’50 days’.”

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