How will India remember demonetisation?

How will India remember demonetisation?
NEW DELHI: "The magnitude of cash in circulation is directly linked to the level of corruption," Prime Minister Narendra Modi had said in his speech on 8 November 2016 that declared that all Rs 500 and Rs 1,000 notes (86% of the currency in circulation then) would no longer be legal tender. While demonetisation did bring down cash usage, it was only temporarily. The total currency in circulation has surpassed pre-demonetisation levels (over Rs 22 trillion compared to Rs 17.7 trillion).

Over 99% of all the demonetised currency notes had returned to the banking system after the drastic move. RBI board that gave its approval for demonetisation had said: "Most of the black money is held not in cash but in the form of real sector assets such as gold or real estate and this move would not have a material impact on the assets."

The RBI board had also said that counterfeiting wasn't a big issue: "While any incidence of counterfeiting is a concern, Rs 400 crore as a percentage of the total quantum of currency in circulation is not very significant."

The fake new design notes of Rs 500 grew the fastest in 2018-19. The government has stopped printing the Rs 2,000 notes introduced after demonetisation, apparently to prevent easy hoarding and because high-quality fakes have appeared in the market.

While digital and card payments rose sharply following demonetisation, the growth in number of digital and card transactions is now growing at pre-demonetisation rates. There's also no evidence to suggest that terror funding or corruption has come down because of demonetisation.

While lowering its GDP growth forecast in August, rating agency Crisil had the following reasons behind the current economic slowdown: It started with demonetisation (in November 2016), dealing a severe blow to consumption, leading to a vicious cycle of job loss and lower income, which led to further drop in demand.

Next shock came in the form of GST (in July 2017), which had a knock-on effect on exports growth because of delay in refunds to exporters. Just as the effects of DeMo and GST were petering out, the IL&FS crisis triggered the NBFC credit crunch in 2018.

At the same time, monetary policy was focused on inflation control, which ensured interest rates remained hard. The government too had little wiggle room to increase its spending to pump-prime the economy given the fiscal deficit target.