Demonetization in India: One year on

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November 8, 2016, saw the sudden withdrawal of 500 and 1,000 rupee notes from circulation in India, in a bid to stamp out the black market economy, corruption and tax evasion. After a period of uncertainty and confusion, the dust has settled on one of Prime Minister Narendra Modi’s most controversial and divisive policy moves.

What happened a year ago?

220 billion US dollars’ worth of currency in the form of 500 and 1,000 rupee notes (worth 7.50 and 15 US dollars) were declared illegal tender, and people across India were given until the end of the year to get the banknotes – which represented 86 percent of money in circulation – out of their pockets.

November 24, 2016: People queue outside a bank in Gurgaon, India. /VCG Photo

Queues formed outside banks, marketplaces once full of small vendors were deserted, and ATMs were left empty. Modi told the public that demonetization was a bid to catch financial criminals, with authorities to be alerted to any deposit made of more than 250,000 rupees (3,750 US dollars).

Nearly 80 percent of the transactions at the time were made in cash, which made up approximately 14 percent of GDP – compared to around five percent in other large economies.

Was it worth it? For and against

Modi’s sudden move was a shock, and debate still rages on over whether or not it was the right thing to do. A year may have passed, but it is still too early to tell whether or not demonetization has been a complete failure or achieved its goals.

For: India went mobile

While not an explicit aim of demonetization, India’s policymakers would have expected a positive knock-on effect for mobile wallets and e-commerce. Unable to accept the illegal currency, small vendors opted for mobile payment apps like Paytm and Mobikwik, sparking a fintech boom across the country.

A sign for mobile wallet Paytm at a street stall selling accessories in Bengaluru, India, Feb. 4, 2017. /VCG Photo

Mobile wallets saw 83.5 billion rupees’ worth (1.28 billion US dollars) of transactions made in January following demonetization, more than double the amount in the month before the banknotes were withdrawn from circulation.

In August, transactions made through mobile wallets fell to 72.6 billion rupees (1.1 billion US dollars), but demonetization has at least caused widespread awareness of mobile payment technology in the country, accelerating “the adoption of digital money by at least three years,” Mobikwik founder Bipin Preet Singh told the Financial Times.

Against: Financial crime hasn’t been halted

As people queued up outside banks to deposit their money, loopholes were quickly established to help get around the 250,000 rupee deposit limit – for example, for a fee someone could deposit cash on behalf of another. Reports of money laundering were rife, with 307 people including 180 civil servants arrested for illegally exchanging the outlawed notes post-demonetization.

The Economic Times of India reports that the black market economy has returned in rural areas, with AFP describing “businesses from street side stalls to wholesalers” rekindling their “love affair with cash.”

For and against: Wider tax base despite return of cash

One of the aims of demonetization was to put an end to tax avoidance by stopping cash-in-hand payments. The reported return of cash payments across the country and a 20-percent drop in mobile transactions from December 2016 to August will be a concern for Modi that his ambitious policy is starting to unravel.

A man counts 500 and 1000 rupee currency note, November 09, 2016, in Allahbad, India. /VCG Photo

However, a major positive has been the widening of India’s tax base. Previously, fewer than five percent of Indian earners were registered taxpayers – but demonetization led to 20 million bank accounts being opened, and nine million newly registered contributing workers. In a country with a rapidly growing population of over one billion people, the numbers are a tiny step – but they are at least a positive move in the right direction.

For and against: Modi’s political image

A policy as controversial and sudden as demonetization was always going to be a divisive gamble. 100 people reportedly died because of demonetization, and the livelihoods and businesses of millions of people suffered amid a spending slump that has had a wide and negative effect on the Indian economy.

VCG Photo‍

Modi does have support from business figures and existing tax payers, and there is of course praise for his aims of tackling corruption and crime – although it still remains unclear whether or not this was the best way of tackling such issues.

On the international stage, demonetization sparked surprise from curious onlookers. As a major developing economy, India is looking to shake off a reputation for lax financial regulations in a bid to attract greater investment.

Demonetization was a major attempt to introduce more transparency into the system, and, along with the Goods and Services Tax, it was just one part of the ongoing reforms that Modi feels are necessary to boost India’s development.