Demonetization – Who wins and who loses? – NIDA FATIMA



By Nida Fatima * 



On 8th of November 2016,two semi historic moves were in the making. The Americans were making the uncanny choice to elect Mr. Donald J. Trump as the President of United States. In India, Prime Minister Mr.Narendrabhai Modi was announcing the demonetization of Rs.500 & Rs.1000 with effect from midnight, stripping such notes off the ‘legal tenders’.

Demonetization of higher denomination notes is not new, at least for India, where such steps have been taken in 1946 and then again in 1978.This is technically the third time. But, there exists a huge difference in then and now. The present India has a larger stash of black money but it also has an acutely active media. Let us look at the interrelations which some of the diverse components of the present socio-economic moment shall undergo due to this demonetization.

Manipulating opinions

Looking at the appreciative opinions given by the captains of various banks in The Times Of India (dated 10.11.2016), one realises the power media has in moulding the public opinion. The newspaper even in its editorial(Shock Therapy :To target black money),only highlighted the merits of the act of demonetizing Rs.500 & Rs.1000 notes ,on the part of the government.(The editorial went to the extent of pointing out the political cost which PM Modi is ready to suffer by this executive action. )

Obvious merits

Demonetization of these high denomination notes has manifold effect-positive and negatives both. Some obvious merits ,for instance are ,it will give boost to formal channels of payment ,thus helping them to grow. The shadow economy is 19% of the total Indian economy with black money in circulation being 14% of the total GDP, which will come under threat by this act of demonetization. Reverberations of it shall be heard in the form of terror financing getting curbed. This, in turn will reduce crime and drive growth. Also, counterfeited currency will be squeezed out of the system. And lastly, this step speeds up the achievement of the vision of cashless economy for India and also facilitates the achievement of financial inclusion. But India follows a law which makes the government duty bound to not justify the means for the aim to be achieved. That, the due process (of law) ,which must be just,fair and reasonable and not merely the procedure established by law ,is to be followed,is a long accepted principle imbibed by all the organs of Indian democracy so as to secure procedural justice for the citizens of India; demonetization, as is being done, interalia, challenges this very principle.

The happy banker

It should be noted that bankers would always be supportive especially in the present times when the crisis caused by the NPAs is so heightened. As per the Government direction, people will exchange and deposit the 500 & 1000 Rupee notes with the banks. This shall lead to increase in the lending capacity of the banks, thereby bringing them back to healthy business!

The capitalists will also tender support, since this move hardly hurts their interest. This class does not keep it’s unaccountable money in notes of 500 & 1000.The move of government has worked in diverting the attention from exceptionally large amount of money parked outside Inida, to the lesser amount available with the lower rung of the black money ladder; the real difference makers still go unabated.
The people:money makers and money earners divided

Common masses have undergone another division, with business class and entrepreneurs being one group and salaried class being divided into a satisfied salaried people & the disgruntled salaried people.The innovators will resent the government move for the obvious reason,i.e becoming accountable and ultimately getting penalised for the creation of wealth which resulted from their entrepreneurial skills.The satisfied salaried class shall remain unafffecte,because they do not have anything to hide.The third group is the one which intends to protect itself and its resources by exploiting the loopholes created by the difference in the law, in theory and the law,in practice.In the third group also comes the various levels of administrative machinery,which find themselves rightfully entitled in asking for financial and non-financial favours from the people they are meant to serve.

Informal economy

The harshly negative impact would be suffered by the large rural and informal economies of India,which are largely cash based.The average consumer may also suffer for his lack of technological knowledge,resultingly he might fail to use ATM or other non-cash modes of payment.

Black money doesn’t always remain in money form;it is generally converted into substance of value like gold,land,securities,etc.Some of the small but not so negligible effects,thus,are the appearance of unauthorised intermediaries in rural areas to facilitate the collection & exchange of notes from the people who fail to have any government identification proof or access to a bank.Market of gadgets and white goods seems to be hyper active at the moment,as the people with unaccountable money look for means to make something good from it,before it is put to destruction by the obligation to exchange the notes at the banks or post offices.Super market and such other chain stores would see an increase,howsoever marginal,because many of the consumers to buy goods of daily consumption show a change in preference from easy cash to the cashless modes of payment,option for which is generally not available at the local grocery stores. Online stores will also be seeing a surge in their sales because of them being able to offer alternatives to cash payment.

Financial awareness or the lack thereof

A good portion of the urban poor or the lower strata of the towns is at the mercy of their well aware fellow citizens,who may choose to either help the former by facilitating the exchange process or exploit them by not making them aware of the crucial ongoing of the Indian political economy.Here,need of functionaries like the Bank mitra or similar auxiliaries would be deeply felt.

What is doing rounds among the critics is that demonetization appears to be a step to calm the raising passions among the public against the excesses committed by various State agencies or against the failure in doing their duty,as it can be seen the public attention gets completely diverted from discussing the political abrasions to,either criticizing or applauding the government for its latest action.Moreso,demonetization has turned the politico-economic attention away from the Swiss bank & Panama paper-characters involved wherein,won’t be keeping truck loads of 500s & 1000s in their houses- to the comparatively small players in the game of black money.
Creating popular legitimacy

Linking the black money narrative with terrorism,has developed popular support of a nationalist fervor,which further shrouds the deeper issues involved in this strategic step of the government.

Testing the prudence

The cash to GDP ratio in India is 12% where as the global average is 4%, if demonetization plays well,the Indian ratio shall experience a decrease. The circulation of higher denomination notes in India has a value of 1.5 lakh crore; positive result of demonetization shall mean decrease in this amount. Lastly, whether the demand for gold and thus its import sees an increase or not also points towards the success or otherwise of this strategic action of the government. These three parameters can be considered to gauge the economic wisdom put to use in this surprise move by the government.


Demonetization, like many other governmental moves, has both merits and demerits, which vary as per one’s perspective or one’s role in the economy. Media plays a crucial role both in agitating people’s sentiments as also in keeping them calm. But it is also ethically obliged to play these roles for nothing but the interest of reason and truth and only then shall it be called an unbiased component, which is essential for the proper functioning of the polity. The practice of popularising what is not the absolute truth and that of delineating the public attention from what is supposed by many as an important matter for their civil personality needs to be questioned. Similarly, the joy spreading among some sections of the society with regard to demonetization and the impact thereof on terrorism & corruption needs a reality check especially when, the disruptive side effects of this demonetization, for the informal economy as well as for the public order in the cities have started to weigh heavily on the common man. Whether ‘demonetization2016’ was a risk worth taking or not? Only time will tell.


*The author is a civil services aspirant and studies law at Aligarh Muslim Uiniversity. 

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