On Demonitisation

Modi sarkar demonitised Rs. 500 and Rs. 1000 denominations on 8th November, 2016. It was stated that such step will address three factors: Curtail terrorist funding, unearth undisclosed cash and flush out counterfeit notes. 

I am very doubtful about the success of the first objective. For the second, one would have to wait and watch. And for third there is no doubt that it would be dealt with pretty well. 

The reason why I remain doubtful about meeting the first objective is because terrorists will find ways to exchange their notes. Moreover, they will in few months time begin to accumulate money once more.  If Govt. has to curtail funds to the terrorists, it has to go to the root cause of the problem. And to do that govt. would have to win over the heart and mind of the people who are funding the terrorist. Okay, this cannot be applied to Pakistan. But this can be applied to the supporters of the Naxalites and those in the North East. 

The fact that there are more frequent attacks occurring in Jammu and Kashmir demonstrates that demonitisation does not even have an iota of effect in curbing insurgency. 

For the second point, one would have to wait and see how much money will come back to the Reserve Bank of India. And how much of undisclosed money has been detected. The cost of this exercise has been massive ( 1.25 trillion rupees, says news report), and if the amount of undisclosed money is very small, then the whole exercise would be in vain. So let us wait for the final figure to arrive. 

Regarding counterfeits notes, there is no doubt banks would be able to flush out quite effectively. But this process can be efficiently done without having to demonitise all the big notes at one go. 

The main criticism against the whole process of demonitisation is with regard to the unpreparedness of the concerned authority. The massive cash shortage has hurt the economy. Though it cannot be quantified now, there is no doubt that the blow to the economy will be massive. Had the concerned authority taken adequate steps by way of having got more notes ready or kept the size of Rs. 2000 similar to that of Rs. 1000 so that fitting it into the ATM will be quite easy, the damage would not have been this bad. 

Overall, I would say let's wait and see whether there is net gain or loss. This will show whether demonitisation has been a useful measure or not. This is the first point. The second point is with regard to the prepareness of the concerned authority. And in this regard, my view is that there is no preparation. The way this has been carried out is a disaster.