The Delhi-based lobbyist told me a story he had heard from a minister. On 8 November 2016, as Modi prepared to announce his surprise decision to annul all high-denomination bank notes, he gathered his top ministers. After handing each a piece of blank paper, he asked for their opinions on whether he should withdraw all Rs 1,000 notes, all Rs 500 notes, or both. “Jaitley, being the finance minister, said, ‘We can demonetise 1,000-rupee notes but not 500-rupee notes. It will be a big jolt.’ To which Modi, not in jest but sarcasm, said, ‘Are you saying this because lawyers mostly store their money in 500s?’ Rajnath said, ‘Pehle hi kar dena chahiye tha, I am fully supportive of it.’” Venkaiah Naidu, also a cabinet minister, supported the move as well. Then it was Gadkari’s turn. “He said, ‘This problem of black money should be finished once and for all. Demonetise everything from 1,000 to 100. Nobody keeps bundles of 50-rupee notes.’ Modi was taken aback.” When a colleague later asked Gadkari about this, “he said, ‘He had already made up his mind, he was just doing a paper exercise to corner us. So I tried to go one up on him.’
In short it was the Prime ministers personal pet project, done to drain out the cache of money held by opposition parties.
Gone horribly wrong.
Horrible, and hopefully not precedent setting.
Political it had superb optics.
All in all, it was a political spectacle paid for by the exchequer.
Here are the critical pieces of information needed -
1) The large majority of the Indian economy is "black" - i.e, the unorganized sector.
2) Cash is the main medium of trade, years after demonitization, we are back at similar levels of cash use, indicating no lasting impact on customer habits.
3) The reasons provided by the govt changed by the day, Initially it was sold as "stopping black money" or illegal accumulation of untaxed wealth.
This was updated to "removing counterfeit currency", later "increasing digital transactions".
4) The govt claimed that this was a well planned out strategic move, and not some ad hoc pie in the sky idea they were working on.
However, within a few days it showed clearly that the govt had not planned for the event - Amount of money demonitized >>> ability of the mint to print new notes, even with the several month lead it was supposed to have - if the mint was working non stop for that period.
The new notes did not work with many ATM trays, and this caused further problems- not to mention the scale of the logistical problem in getting the new notes to every corner of the country.
5) Loopholes: Within a few days, if not hours - people were using mules to launder money.
The govt said that you could deposit only X amount of money, after which you had to account for it and show where you got it from. The argument was that people holding untaxed or corrupt proceeds, would not be able to deposit them.
however - almost all the money demonitized was re-deposited into the banking system. This means that all the untaxed money, somehow was legally deposited in legit bank accounts.
PS) Indians HATE corruption, and the idea that someone got ahead of them by cheating. People happily accepted the sudden demonitization announcement because they believed that the rich and corrupt will suffer. This was why the PR was good.
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For each of the stated reasons given by the government, it is easy to show with actual numbers, that the exercise failed to achieve its goals.
Where a positive improvement can be shown, the gains are not commensurate to the losses incurred by the economy, and costs paid to undertake the exercise.
Digital transactions have not increased significantly, for example - and will not until the underlying telecom and trade infrastructure improves.
Most of the wealth was recovered, and very few people, if any have been caught as a result of this - especially since its common knowledge that most politicos sit on piles of cash.
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However, it is very likely that the goal of the exercise was to harm other political parties who had cash based war chests.
Since the people most harmed by this are in the unorganized sector, the results will not show in any GDP projection.
The current dispensation is far more pro corporate than the previous govt, and so their chief patrons and metrics are not impacted, so it was at a relatively low political cost for the party.
In short, it was an audacious political stunt, and carried out with verve. Its also hard to criticize it because of the amount of ire you attract online for being negative about actions of the current dispensation.
SO please note, this is the take on Demonitization, and not on the BJP entire.