Demonetization, its implementation and intent. Will it serve the purpose? Partly Yes and a BIG NO.

On the evening of 8th November, 2016 at around dusk, I withdrew some cash as I was down to the last penny in my wallet. The ATM dispensed all INR500/- notes, much to my displeasure. But that wasn't done for the evening. FC Goa was having a bad day in Kochi, with 2 players red-carded, in a very high octane match. Still it wasn't done. My mobile phone started buzzing with notifications from whatsapp messages announcing that the cash I withdrew few hours ago, will no longer be a legal tender.

It was a very bold move and a step in the right direction. Demonetizing the high value currency denomination meant the system would get into auto-clean mode, clearing out all cash hoardings mostly black dealings, and counterfeit notes. Like most Indians, I too was inconvenienced by this announcement as I had just the 500 rupee notes in my wallet. The banks and ATMs would be closed  the next day and being in a third tier city where most transactions for essential commodities are in cash, meant that I was with no money for the next day.

Any move by the Government to eradicate the menace of the parallel economy, especially this demonetization is highly appreciated, but its implementation could been better. Soon after its announcement people started offloading the 500 and 1000 rupee notes in the market, and before you could realize it, there was no change left with anyone. Purchasing essential commodities became difficult, and not to mention people with emergencies were highly inconvenienced. Though many traders, like my milkman, were sympathetic to their loyal customers, who not only allowed credit, but also shared some of the few hundred rupee notes they had with them.

What could the government have done differently? They could have quietly stopped/reduced the circulation of the higher denomination notes for at least 3-4 days before the announcement without raising any flags around in the market. This could be done at least in ATMs as mostly customers withdraw smaller amounts from the machine.

Next question is whether the purpose of this exercise be fulfilled? My analysis, partly YES, and a BIG NO.

As I said earlier, the system went into an auto-clean drive, clearing all cash hoardings and counterfeit notes. Many tried to convert the black into white by various means. (This is good as the black will enter the white economy).

• Some booked travel tickets with cash and then cancelled them or will cancel them later, to get a refund in white. 
• Some over invoiced.
• Some over purchased in cash (inflated inventory)
• Some showed back dated transactions
• Some distributed it among relatives/friends/workers only to be collected later after it is exchanged. 
• Some invested in commodities like Gold, etc, and some even fuel. 

The exchange facility also has its loop holes. (below is a rough calculation of how much a person can convert black into white)

• A person can exchange INR4000/- at a time in a bank or post-office. 
• He has 50 days to repeat this exercise. i.e. 4000*50=2lakhs. 
• Suppose he is able to visit 10 different banks with different ID cards, he can then exchange 2lakhs*10=20lakhs.
• Suppose he employs 9 other people apart from him, to do the exact same thing then 20lakhs*10=2crores. (without considering commission) 

Instead of this exchange facility, people should have been made to deposit in the KYC compliant accounts, and then shown as withdrawals. Doing this would have ensured that the money could be traceable. Jan-Dhan accounts/Aadhar linked accounts could be used for this purpose. 

Another amusing thing was, that when the government admitted that there is a huge concern of counterfeiting and hoarding of high denomination notes, how they thought of introducing even higher denomination in the supply? As per me, it clearly defeated the purpose of the whole exercise. It is one thing that the current black money or hoarded money will enter the white economy in the next few days, but eventually the new notes of higher denomination will make its way back in the hoarding hideouts. Not to mention, the new entrants of the counterfeit money. Some people say it will not be easy to counterfeit, but let me remind you, it may be difficult for the general public like you and me, but the ones doing the counterfeit business are the organized crime syndicates and cartels.

Introduction of new notes of INR500/- is understood, but introduction of a newer denomination of INR2000/- could have been avoided. Yes, there was a need to replenish the supply of the demonetized notes, and that could be done by introducing the newer denomination lower than INR500/-, say INR200/- 

It is only when people are inconvenienced in transacting in cash, that they would move to alternative payment modes. Introduction of INR2000/- note has made cash transactions of higher value even more easier, in fact double easier.

In my closing remarks, I would say that the Governments effort is very well appreciated and it is rightly receiving all the co-operation from the Indian public. Some pointers or loopholes the government could have been considered for evaluation. I don't see the next demonetization anytime soon as it an hugely expensive exercise. But when next time it happens, I hope these things are considered.