Demonitisation

On 8 November 2016, the Government of India announced
the demonetisation of all ₹500 and ₹1,000 banknotes of the Mahatma

Gandhi Series. It also announced the issuance of new ₹500
and ₹2,000 banknotes in exchange for the demonetised
banknotes.1 Prime Minister Narendra Modi claimed that the action
would curtail the shadow economy, increase cashless transactions
and reduce the use of illicit and counterfeit cash to fund illegal
activity and terrorism.2 3 4
The announcement of demonetisation was followed by prolonged

cash shortages in the weeks that followed, which created significant
disruption throughout the economy.5 6 7 8 9 10 People seeking to
exchange their banknotes had to stand in lengthy queues, and
several deaths were linked to the rush to exchange cash. 11 12
The government estimated that ₹5 trillion, or approximately 20%, of

the demonetised banknotes would be permanently removed from
circulation. However, according to a 2018 report from the RBI, 99.3%
of the demonetised banknotes, or ₹15.3 trillion of the ₹15.41 trillion
that had been demonetised, were deposited with the banking
system. The banknotes that were not deposited were worth ₹107.2
billion. Commentators concluded that the government had failed in
its aim of purging black money from the economy.
The BSE SENSEX and NIFTY 50 stock indices fell over 6 percent on
the day after the announcement.15 The move reduced the
country's industrial production and its GDP growth rate.16 It is
estimated that 1.5 million jobs were lost.17 The move also saw a
significant increase in digital and cashless transactions throughout
the country.18
Initially, the move received support from some central bankers as

well as from some international commentators. The move was also
criticised as poorly planned and unfair, and was met with protests,
litigation, and strikes against the government in several places
across India. Debates also took place concerning the move in both
houses of Parliament.
In 2012, the Central Board of Direct Taxes recommended against

demonetisation, saying in a report that "demonetisation may not be
a solution for tackling black money or shadow economy, which is
largely held in the form of benami properties, bullion and
jewelry."25 26 According to data from income tax probes, black money
holders kept only 6% or less of their wealth as cash, suggesting that
targeting this cash would not be a successful strategy.
The Board of the Reserve Bank of India met on Nov 8th, 2016, 5:30
PM to consider a letter from the Ministry of Finance regarding
demonetization. "Two key reasons for the proposal cited in the
government letter were: (1) between 2011 and 2016, the supply of
500- and 1,000-rupee bills had grown by 76 and 108 percent,
respectively, while India's economy had only grown by 30 percent
during this period; and (2) cash typically facilitated "black money."
The board was further told that the measure was also intended to
encourage greater financial inclusion and to incentivize greater
digitization of the economy. The board approved the proposal, but
not before making a few trenchant comments. It noted that the
measure may not have the desired effect on black money because
most people do not hold undeclared wealth in cash. It further
worried about the negative effects on growth that were likely to
occur in the short run.
Possibly the most damning observation was that the primary fact on
which the government had based its proposal—that the supply of
500- and 1,000-rupee bills had far outstripped the growth rate of the
economy—was simply wrong. The board pointed out the
embarrassing fact that the government had compared GDP growth
in real terms with the growth of currency supply in nominal terms. In
fact, nominal GDP growth had summed to over 80 percent between
2011 and 2016 and hence was in line with the growth of the
currency bills to be demonetized.
The Union cabinet was apprised of the plan on 8 November 2016 in

a meeting in the evening convened by Prime Minister Modi. 38 Soon
after the meeting, Modi announced the demonetisation in an
unscheduled live national televised address at 20:15 IST.39 40 He
declared circulation of all ₹500 and ₹1,000 banknotes of
the Mahatma Gandhi Series as invalid effective from the midnight of
the same day, and announced the issuance of
new ₹500 and ₹2,000 banknotes of the Mahatma Gandhi New
Series in exchange for the demonetised banknotes.41
Information leak rumours
In an interview of prominent businessmen 'allegedly' claimed after

the announcement of demonetisation that they had received prior
tip-offs and rumours warning of the move and after seeing leaked
photos of new ₹2,000 notes "knew what was coming", allowing them
to preserve their money by converting it into smaller
denominations.42 A BJP MLA from Rajasthan, Bhawani Singh Rajawat,
casually claimed in a video that wealthy businessmen were informed
about the demonetisation before it occurred. He later denied making
the comments.43 44
The Reserve Bank of India stipulated that the demonetised

banknotes could be deposited with banks over a period of fifty days
until 30 December 2016. The banknotes could also be exchanged
for legal tender over the counter at all banks. The limit for such
exchange was ₹4,000 per person from 8 to 13 November, was
increased to ₹4,500 from 14 to 17 November, and reduced
to ₹2,000 from 18 to 25 November.1 45 46 47 The exchange of
banknotes was stopped completely on 25 November, although the
government had previously stated that the volume of exchange
would be increased after that date.48 International airports also
facilitated an exchange of banknotes for foreign tourists and out-
bound travellers, amounting to a total value of ₹5,000 per
person.49 Fuel pumps, government hospitals, railway and airline
booking counters, state-government recognised dairies and ration
stores, and crematoriums were allowed to accept the demonetised
banknotes until 2 December 2016.5
Objectives and outcomes
The government said that the main objective of the exercise was
curbing black money, which included income which had not been
reported and thus was untaxed; money gained through corruption,
illegal goods sales and illegal activities such as human trafficking;
and counterfeit currency. Other stated objectives included
expanding the tax base and increasing the number of taxpayers;
reducing the number of transactions carried out by cash; reducing
the finances available to terrorists and radical groups such as
the Naxalite Maoists; and integrating the formal and informal
economies.
Terrorism and internal security
Initially following demonetization, activities and attacks by the

Maoist Naxalite radical groups decreased, which was attributed to
lack of finance following demonetisation. The surrender rate had
reached its highest.104 105 106 107 108 The activities returned within few
months.109 110 There was a decrease in the terror activities in Jammu
and Kashmir.111 112
Long term impact
In 2019, India experienced an economic slowdown which was

attributed to demonetisation and several other factors. 286 287
During the COVID-19 pandemic, there was an increase in digital

payments. The general rise in digital payments and cashless
transactions has been attributed to the demonetisation. Although
data released by RBI in Nov 2021 showed that cash circulation in
India has actually increased significantly since demonetization and
demonetization has not necessarily converted cash users to digital
users.288
As of November 2021, further increases in digital payments and

bank notes in circulation has been seen. 289

Demonitisation

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Demonitisation

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On 8 November 2016, the Government of India announced

the demonetisation of all ₹500 and ₹1,000 banknotes of the Mahatma

The announcement of demonetisation was followed by prolonged

The government estimated that ₹5 trillion, or approximately 20%, of

Initially, the move received support from some central bankers as

In 2012, the Central Board of Direct Taxes recommended against

The Union cabinet was apprised of the plan on 8 November 2016 in

In an interview of prominent businessmen 'allegedly' claimed after

The Reserve Bank of India stipulated that the demonetised

Objectives and outcomes

Terrorism and internal security

Initially following demonetization, activities and attacks by the

Long term impact

In 2019, India experienced an economic slowdown which was

During the COVID-19 pandemic, there was an increase in digital

As of November 2021, further increases in digital payments and

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