Audio podcast: 5 years on, the failures of demonetisation are even more stark

Ashraf Engineer

November 13, 2021

Hello and welcome to All Indians Matter. I am Ashraf Engineer.

Fact No 1: On November 4, 2016, just four days before a disastrous demonetisation was inflicted on India, the value of currency notes in circulation was Rs 17.74 lakh crore.

Fact No 2: On October 29, 2021, the value had risen to Rs 29.17 lakh crore, according to Reserve Bank of India data.

Prime Minister Narendra Modi had justified the sudden invalidation of 85% of currency notes in circulation as an attack on unaccounted for income and to encourage a digital economy. But the value of notes in circulation has actually risen by 64% since then. There can be no greater evidence that demonetisation failed in its objective, not to mention the lives it cost, the jobs it vapourised and the distress it caused to the poorest of the poor.


November 8, 2021, marked five years of the invalidation of Rs 500 and Rs 1,000 notes. Subsequently, the government issued new Rs 500 and Rs 2,000 banknotes. If the aim was to reduce cash in the system and to lower the volume of cash payments, demonetisation was a spectacular failure. Cash in the system is rising at a fast clip. This is hardly surprising because India has always been a cash economy, something that seems to have escaped Modi’s attention.

The decision was announced a mere four hours before it came into effect, leaving people scrambling. Serpentine lines outside banks and ATMs to exchange old notes for new became common. Many people lost not only all they had, they lost the means to survive too. Economic activity was subdued for months.

It was a nightmare that continues to hurt India even today.

Government spokespersons struggled to justify the move. Initially, they said surprise was necessary to catch those with black money off guard. However, it became clear very fast that much of this cash was converted into assets like gold and real estate that could simply be sold later.

It must be understood that unaccounted for income is not held only in the form of cash. It can be in the form of, say, undervalued inventory or money transferred to safe locations abroad. Demonetisation affects none of this.

In fact, it may have even created more ‘black’ money. Corrupt bank executives charged those willing to pay a price to take in old notes in exchange for new ones. This meant more black income. Some others used proxies. The proxies deposited illegally held cash in their own accounts in return for a fee, returning the money later. And the printing of Rs 2,000 notes made it even easier to hoard cash. The dichotomy in the logic – if we can call it that – boggles the mind.

Meanwhile, the government continued to change the justification for the move. First, it said it wanted to weed out black money. Then it said it was a strike against counterfeiting. Later, it said demonetisation was needed to end the financing of terrorism. Ultimately, it had no bearing on any of these.

I’ve already talked about black money. Counterfeiting, too, was unaffected because the foreign entities involved in it were not touched. As for terror financing, it’s done through illegal transactions abroad, usually in foreign currency. Demonetisation has no effect on it.

Finally, following a public uproar, the government changed its justification again. It said the objective was to create a cashless economy. The latest Reserve Bank data puts an end to that argument too.

As I said earlier, India is a cash economy. Cash is this country’s lifeblood. It makes little sense to drain it – especially because we have a very large unorganised sector. About 94% of the workforce is part of the unorganised sector and is completely dependent on cash for sustenance. Much of the population is unbanked and the unorganised sector also includes the micro and small units which, too, work outside the banking framework. So, people lost incomes, there was severe rural distress and many businesses had to shut.

The long-term effect is being felt even today. Demonetisation led to a spike in unemployment and a dip in demand. This meant that India was experiencing an economic downturn even before the COVID-19 pandemic. So, when the pandemic did hit, the economic carnage was amplified manifold.

No matter what the stated, and ever-changing, goal, demonetisation did not achieve it. But it did cause great damage. It’s what is called a policy-induced crisis. And it disproportionately harmed farmers, daily-wage labourers and women. The tragedy is that there is little acknowledgement from those who unleashed it on the country. And there seem to be no lessons learnt.

Thank you all for listening. Please visit for more columns and audio podcasts. You can follow me on Twitter at @AshrafEngineer and @AllIndiansCount. Search for the All Indians Matter page on Facebook. On Instagram, the handle is @AllIndiansMatter. Email me at Catch you again soon.