Efficacy of Demonetisation in Eliminating Black Money: An Analysis of Indian Demonetisation November 2016

Abstract

Indian demonetisation 2016 targeted to eliminate black money and counterfeit currency has been questioned in the economic and political discourse on the ground of hardship faced by millions and return of 98.96% of banned currency to the system. It was a popular expectation that a good proportion of banned currency would not return to the system as the black money holders might destroy them to avoid legal consequences. While the demonetisation strategy is dubbed as a failure based on "cash seizure" parameter, this article reviewed its efficacy using five broader perspectives: data mining to trace the sources of disproportionate cash holding, Economic growth and corruption are found to be negatively correlated except the "Asian Paradox" observed in few research studies. In general, Indian economy is smudged by high level of corruption, tax evasion and accumulated black money which has been reflected in the continuing low rank of India in the Corruption Perception Index. Demonetisation failed in "cash seizure" parameter as the black money held in banned currency was traded with organised money laundering groups at a high discount which then were deposited back to the system. The success of the demonetisation strategy is primarily linked to the success of "operation clean money" launched by the tax authority under which the depositors with unaccounted wealth is traced back through data mining from disproportionate deposits during the transition period.

Demonetisation in India and its Effect in Nepal

“…According to Ghosh (2017), general public across all income groups and locations rated f) demonetization as a good step and well implemented strategy to involve people in fight against corruption, tax evasion and black money.…”

“…Indian demonetization 2016 did not result in direct 'cash seizure' i.e. the holders of black a) money did not deposit in bank the unaccounted wealth in the form of cash (Ghosh, 2017). Demonetization gave rise to liquidity problem as people found it difficult to get sufficient b)…”

“…The demonetization strategy is dubbed as a failure based on 'cash seizure' parameter d) (Ghosh, 2017). Kushwaha (2018) explored the impacts of demonetization in India and found following e) negative impacts:…”

Influence of demonetization on various sectors of the Indian economy

“…The sudden cash shortage impacted vulnerable sectors such as farmers, casual workers, micro and small traders, and lowincome households (Viswanathan, Jaikumar, Sreekumar & Dutta, 2021). It caused a fall in economic activities (Ghosh, 2017). As per the RBI reports, the impact of demonetization started diluting in January 2017 and dissipated by mid-February, indicating the pace of remonetization (RBI, 2017).…”