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THE Centre has advanced three arguments in favour of the recent demonetisation.

First, the announcement of PM Modi at 8 PM on November 8 that froze a whopping 86 per cent of the legal tender in the country by a single stroke would automatically drive the counterfeit currency out of circulation, thereby ‘cleansing’ the economy to a great extent.

Second, the ‘terror fund’ supposedly operated through the conduit of counterfeit currency would now on run dry.

Third, demonetisation of the two high denomination currency notes would weed out unaccounted money stockpiled by the dishonest citizens out of their illegal economic activities.

Political parties in the Opposition have, interestingly enough, come out with exactly three counterarguments.

In fact, the critique of the move put forward by a range of economists including Prabhat Patnaik, Kaushik Basu, and Raghuram Rajan in the public domain also mostly entails the same counter-narrative. The argumentative binary, culled from the heaps of articles, comments, and reactions flooding all platforms of media in India and abroad, can be put concisely in the following manner.


To begin with, the whole story about neutralising the terror fund through nullifying certain denominations of our domestic currency is not grounded in either theory or empiricism.

Theoretically, such an explanation does not stand legal inquisition, mainly because of the fact that if Indian currency could be faked earlier, it can be done now as well. Empirically, the government does not possess a credible time series data bank to suggest that there exists a high positive correlation between demonetisation of notes and dismantling terror network.

Terrorists of all faiths and ideologies, various researches have found, manage their ill gotten fund through electronic transfers and hawala transactions in foreign currencies.

An important point in this connection calls for attention. Even if demonetisation is indeed an effective tool in the war against terror which India claims to have done with ‘surgical precision,’ can the same strategy be resorted to by the USA? Can an America under Trump call back, let alone demonetise the greenback which is an international reserve?

The answer is perhaps no. It’s a well circulated fact that the global terrorism makes use of both US dollars and US armaments. With the tacit knowledge that the US establishment can’t ever afford to transform some of its Federal Reserve supply to scraps of paper, even if such a move would surely make a dent at the global terrorism, how can India, whose currency in any case is not a legal tender outside its sovereign boundary, inflict damage to the terrorists with this monetary strike?

The third argument, offered by the South and the North Blocks, squarely deals with ‘black money.’ To this the standard response from both the political Opposition and the academia is heavily loaded in proving the step an ineffective one.

What is coming out from the polished argumentative discourse of say P Chidambaram and a kind of impulsive outbursts from Mamata Banerjee have a queer similarity between them.

They are basically trying to put across the expected narrative ~ the hoarders of unaccounted money in any case will find hundreds of avenues to convert their ‘black’ bucks into ‘white’ bucks, thereby rendering the elaborate exercise a futile one while the government is putting the ordinary citizens to untold misery and harassment besides subjecting the official kitty to a drain of around twenty thousand crore of rupees as the cost of replenishment of currencies.


Such a blunt and close-ended debate has missed couple of very cogent points which may go to build a strong case for demonetisation strictly as a tool against black economy, purely based on commonsense.

First thing should come first. What is the estimated quantum of unaccounted money stashed ‘under mattresses’ in the high denominations of Rs 1000 and Rs 500 that would eventually turn into scraps of paper?

Interlinked with this query is the larger question ~ what percentage of this ‘black’ liquid wealth would successfully discover multiple channels like gold, jewellery, real estate, hawala market, and, of course, non-suspect bank accounts to purify itself and propel the black economic activities in the next round?

At this point of time, any attempt to find numerical answers to this brace of questions would amount to sheer speculation.

Let us rather go by a simple rule of subtraction. As on 31 March 2016, RBI Annual Report showed that the number of pieces of Rs 500 notes in circulation was 1570.7 crore and that of the Rs 1000 denomination was 632.6 crore. Between them these two denominations accounted for 24.4 percent of the total number of pieces of notes of all varieties in the economy.

In value terms, they constituted 86.4 percent of ‘money on the wings.’ Since 31 March 2017 is the last day until when held back cash in the two notes can be disclosed and converted (beyond 30 December 2016 this can be done only at some designated RBI points), we can expect that on 1 April 2017 the RBI can come up with a cardinal number as to how many ‘tainted’ notes eventually did not manage entry to the bank circuits.

For this, the figures for 31 March 2017 can be compared with the corresponding figures for the previous year. And the nation would instantly come to know the quantum of black buck destroyed in the process.

But the buck does not stop there. In order that this rather ethical action could be drawn to its logical conclusion, the government must walk some extra miles. All the commercial banks need to be asked to make public the list of accounts holders in whose accounts any critically suspicious sum exceeding say Rs 50 lakhs were deposited during the period 10 November to 30 December this year.

The RBI, on its part, should also put up in the public domain the similar list of those citizens who would have converted their hitherto undisclosed stock of demonetised notes over the counter from 31 December 2016 to 31 March 2017.

Already a sting operation by a web portal has accused three major private sector banks in the country of indulging in money laundering. Veracity of the sting video posted on the website of the investigative magazine cannot be ascertained right now. But such misdemeanor by a section of the financial sector operators cannot surely be ruled out.

The modus operandi clearly points to the apprehension in the air that various such channels are accepting the stock of old notes and splitting them to tranches of investment, insurance, and benami accounts in an ostensible bid to frustrate the very purpose of demonetisation. The enforcement agencies like IT, ED, and CBI need to exercise extra vigil at the moment.


The moot issue, however, concerns the economics of demonetisation. Even if the present effort at debugging the economy through destruction of the black hoards proves to be successful, what good will it bring to the state of the economic affairs? The cacophony of the controversy has seemingly silenced this question which otherwise needs a thorough probing.

The total amount of black money in Indian economy, whose exact size cannot obviously be officially put, is surely available in both stock and flow. Money ~ black or white ~ begets money.

Going by this postulate, a part of the money earned through illegal activities again goes to spin money in various economic activities. The remaining chunk is the stock of black money which cannot be declared before the taxmen.

Now this ‘money sitting,’ apart from making huge dislocation in the formal economy, is also a leakage out of the income stream. The portion of the wealth, kept in the form of assets of highest liquidity, reduces the working of the investment multiplier of the Keynesian type. As a result, growth is retarded.

The present bout of demonetisation in the short run will disturb the demand-supply equilibrium in the money market which will have a ramification in the real sector also.

Contracted money supply, which is expected to sustain over a year or so, in all probabilities, will not only tell upon transaction volume, but it will also tend to jack up the real interest rate in the medium term which does not portend well for an already stressed investment scenario in the economy.

Finally, in the long trajectory, however, the market fundamentals and expectation including the growth predictions need to be adjusted and, perhaps downgraded, as economic activities, propelled as they are very much by the black economy also, will slow down consequent on this Modi mayhem.

(Joydeep Biswas is an associate professor of economics at Cachar College, Silchar, Assam. To see all his previous articles, click here)  

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