Given that the Indian bank note demonetization happened in November 2016, it is a good time to assess this initiative now in March 2019 because of two reasons:
1) to review the 5-year performance of the Indian Central Government just before the National Elections
2) Looking back at an event that happened 2.5 years ago gives a better perspective.
Few key takaways:
1) Nothing very bad to the economy happened as alleged by many. Informal sector was hit more than expected but it was due to inherent weaknesses and not because of demonetization. Let's say the informal sector contracted by 5% resulting in the contracting of formal sector by about 2%. This minor negative outcome was unintentional -- the price paid for the boldness of a new noble initiative.
2) Bad actors in the economy such as the corrupt and tax evaders were hit. However they were not hit as much as expected. Let's say they took a hit of 15% of their black money -- as this is the cost of converting their old currency notes to new notes.
3) Counterfeiters were hit very badly. However, in the scheme of things, this number is very small.
4) Bank employees, chartered accountants, enterprising poor people who had bank accounts and certain enterprising businessmen are the biggest beneficiaries. They earned the black money that was lost by the bad actors mentioned in point #2! This resulted in a small amount of reduction in wealth inequality because of the wealth transfer of black money from the richer bad actors to the poorer bad actors! This is the biggest benefit of the initiative!
5) Unfortunately, almost all the old currency was converted to new currency. This is the biggest failure of the initiative!
6) A gain in public behavior to opt for digital payments instead of cash payments.
7) A gain in awareness among the people about the ill-effects of corruption.
8) Loss to tax payer money in printing and distributing the new currency notes.
9) The hassle for the common man to exchange old currency notes to new currency notes is negligible.
What could have been done better:
1) Not releasing the 2000 INR currency note at all. Instead, more units of 500 INR currency note should have been printed.
2) Better monitoring mechanism by the intelligence teams to avoid the conversion of old currency notes to new currency notes by the bad actors.
I commend the Government for this initiative. It certainly was a noble thought with average execution. Certain initiatives succeed, certain initiatives fail. It is better to try something noble instead of not doing anything. I am glad that the Government made a good attempt.
Do not believe those who criticize demonetization heavily. Do not believe those who hype the success of demonetization heavily.
