Explained: Where Do We Stand After 50 Days Of Demonetisation Drive

The 50 days that Prime Minister Narendra Modi appealed for is over. But the chest-thumping/breast-beating over demonetisation is not. And the din created by both drowns out any rational discussion on whether the exercise was good, bad or ugly. Here’s an attempt to cut through the noise and recap some of the facts.

So, what exactly happened on 8 November?

Prime Minister Modi addressed the nation and announced that effective from 9 November, all Rs 500 and Rs 1,000 notes of the current series (including pre-2005 ones) would cease to be legal tender. That means people could not use them to buy and sell goods and services. Technically, this was not demonetisation, but de-legalisation. The actual demonetisation happened with the proclamation, on 30 December, of the Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016, which reduced those notes to worthless bits of paper.

What does the ordinance do and why was it necessary?

Under Section 34 of the Reserve Bank of India (RBI) Act, 1934, the central bank has a liability to honour every currency note – anyone presenting that note has to get the value printed on it, whether Re 1 or Rs 2,000. As long as a note does not come back to the RBI, it continues to be a liability.

The only way this liability can end is for the government to expressly state that the old notes cannot be redeemed any more, which is what the ordinance does.

How much of old Rs 500 and Rs 1,000 notes were sloshing around before 8 November? How much has been returned or exchanged?

As of 9 November, the high denomination notes worth Rs 15.44 lakh crore was with the public.

There are various estimates of the money that has come in, based on data from the RBI, but it’s best to wait till the central bank puts out a figure. There could be double counting in the estimates that are going around right now.

Besides, though one will get a pretty accurate estimate in a few days or a week, an absolutely exact figure on notes returned will be known only after some months. Remember, that while the deadline for deposit of the old notes in banks ended on 30 December, resident Indians can still deposit these notes in the offices of the RBI till 31 March and non-resident Indians (NRIs) can do so till 30 June. These are the only two windows given by the ordinance. Resident Indians will have to give a declaration that they were outside the country between 9 November and 30 December.

In addition, people can declare their unaccounted wealth held in cash under the Pradhan Mantri Garib Kalyan Yojana, the second income declaration scheme that was announced on 16 December. The window for this too is open till 31 March. (Some of this could be in new notes, if black money holders have managed to launder the cash they held.)

But the amount returned by NRIs between 31 March and 30 June is not likely to be huge, so it is best to wait till mid-April to get a sense of how much of the demonetised currency has been returned.

Can the window given to NRIs be used to launder large sums of money?

Unlikely. A notification under the ordinance stipulates that the amount of demonetised currency returned by an NRI cannot exceed what is specified under the Foreign Exchange Management (Export and Import of Currency) Regulations, 2015, issued under the Foreign Exchange Management Act, 1999. That limit is Rs 25,000. That’s why the amount returned by NRIs is not likely to be huge.

What is this fuss about my not being able to even keep old notes with me?

The ordinance gives a grace period (31 March and 30 June) for the return of the demonetised currency. So it is not as if you will be penalised for holding old Rs 500 and Rs 1,000 notes between 30 December and 31 March. Beyond this grace period, a person can hold only a total of 10 notes of both denominations (five Rs 500 and five Rs 1,000 or two Rs 1,000 and eight Rs 500, or all 10 of the same value etc) or only 25 notes for study, research or numismatics.

Anyone holding more than this (other than the RBI or anyone ordered to do so by a court in connection with a case) will have to pay a fine of Rs 10,000 or five times the amount of the value of currency found with him, whichever is higher.

Since these notes will be just worthless pieces of paper, what is wrong if I, say, decide to make a collage of 100 pieces and put it up in my drawing room? Or just keep it in my locker and periodically rue the day I decided to evade taxes or make money through crooked means?

Good question, this provision does defy logic. But, no answer. It’s also not clear how the authorities will come to know about people holding more than the specified number of notes beyond the grace period.

Fifty days on, has the inconvenience ended?

The short answer to this is, no, though the situation has improved since the first two weeks post 8 November. Finance Minister Arun Jaitley and RBI governor Urjit Patel have assured that there is enough supply of cash. But all of this is not making its way to banks. The curbs on cash withdrawal have not been rolled back entirely; though the limits for ATM withdrawals have been increased from Rs 2,500 to Rs 4,500 but the weekly withdrawal limit remains at Rs 24,000. There are still ATMs and bank branches with no cash, even in metros. For every story of no inconvenience, there is another of inconvenience and harassment.

Has demonetisation met the objectives it was supposed to achieve?

The jury is still out on this.

In his 8 November address, Modi said the move was meant to “break the grip of corruption and black money”.

But black money is a consequence and not a cause of corruption. Merely demonetising high value notes will not eliminate corruption; discretionary power in the hands of the politicians and bureaucrats has to end. This needs a complete recast of governance systems.

The fact that through the past 50 days, there have been seizures of large volumes and value of new currency notes shows that the money-laundering industry has not been hit at all by the demonetisation move. All that happened was that the commission dropped from 40 per cent before the announcement of the Pradhan Mantri Garib Kalyan Yojana to 25 per cent.

Funding of political parties also needs a complete revamp. Political parties are a major conduit for unaccounted money and large cash donations are quite common. Cash donations up to Rs 20,000 need not be reported to the Election Commission and this is a major loophole that all political parties exploit. Nothing has happened to change this.

In his address, Modi also spoke about how fake notes of Rs 500 and Rs 1,000 have been used in terror financing. The new notes have extra security features and were supposed to deal a body blow to the counterfeiting industry. But the seizure of some counterfeiting machines in the past week has raised some doubts about this as well.

What has been the impact of demonetisation on the economy?

Negligible, if you go by the government and supporters of the move and totally disastrous, if you go by the opposition parties and other critics. The truth, as always, lies somewhere in between.

The lack of cash has hit consumption. Despite the government’s massive push for digital payments, the continued curbs on cash withdrawals are likely to exacerbate the problem. People are still holding on to whatever notes they have and cutting back on discretionary spending.

The lack of cash has also affected the small and medium enterprise sector and the unorganised sector, where transactions are largely in cash. There have been job losses, but there’s no knowing if this is insignificant or colossal.

It may take at least a couple of months for the cash situation to normalise. Growth in this fiscal will definitely be hit. As for the long term impact, it will be known, well, only in the long term.