What Was the Point of Demonetisation?

An extract from Demonetisation Decoded by Jayati Ghosh, C.P. Chandrasekhar and Prabhat Patnaik, talking about what explains the government’s decision and popular support for it.

A notice is displayed stating the refusal to accept old Rs 500 and Rs 1000 Indian rupee banknotes at a market in Allahabad, November 24, 2016. Credit: Reuters/Jitendra Prakash/Files

A notice is displayed stating the refusal to accept old Rs 500 and Rs 1000 Indian rupee banknotes at a market in Allahabad, November 24, 2016. Credit: Reuters/Jitendra Prakash/Files

On November 8, 2016, Prime Minister Narendra Modi announced that 86% of India’s currency would no longer count as legal tender. The demonetisation of Rs 1000 and Rs 500 notes was, the government said, meant to curb black money, encourage digital transactions and deal a blow to terrorists using counterfeit currency. Months later, it doesn’t look like any of those aims have been achieved – something economists predicted even when the project was first undertaken.

In their book Demonetisation Decoded: A Critique of India’s Currency Experiment, Jayati Ghosh, C.P. Chandrasekhar and Prabhat Patnaik discuss the goals, implications, initial effects and the political economy of this move. In the excerpts published below, the authors talk about what explains the government’s decision and popular support for it.


Demonetisation was not necessary to eliminate corruption in India and was largely unsuccessful in meeting its declared goals, even as it caused significant damage to the economy and adversely affected the material conditions and rights of the Indian people. It singularly failed to achieve the main objective it was meant to serve, namely, dealing a blow to the “black economy”; instead all it managed to do was to shift vast amounts of cash from the possession of the people who were using it as means of circulation to the vaults of the banks where it lay idle. This is precipitating a recession in the real economy, while simultaneously it entails demands on the government, ironically, to use budgetary resources to pay interest to banks as compensation for holding this cash.

Jayati Ghosh, C.P. Chandrasekhar and Prabhat Patnaik <em>Demonetisation Decoded</em> Routledge, 2017

Jayati Ghosh, C.P. Chandrasekhar and Prabhat Patnaik
Demonetisation Decoded: A Critique of India’s Currency Experiment
Routledge, 2017

The question that naturally arises in this context is: what was the point of this entire exercise? Why was such a major policy decision taken at all, and that too without any evidence of the necessary preparation that would have eased some of the problems faced by the people? Attempts to find answers to this question have ranged from invoking the political context and the impending state elections to underscoring deeper issues of the dynamics of class relations under neo-liberalism. The argument about political expediency suggests that by adopting this measure all of a sudden, the ruling party caught the opposition in states like Uttar Pradesh unaware and inflicted upon it an acute financial stringency since the cash with these parties got frozen by demonetization; on the other hand the ruling Party itself had advance notice of the measure and had taken adequate precautions to preserve its own financial position. Under the garb of attacking “black money”, demonetisation was a way of stealing a march, financially, over the opposition parties in the forthcoming elections.

A second line of argument, which likewise invokes the current political context, emphasizes not the financial implications of this move, but its propaganda value. It suggests that this was a diversionary tactic, designed to draw attention away from the fact that – despite its fervent campaign promises – this government had thus far done very little to deal with the problems of black money and corruption. Many of the promises made before its coming to power, such as bringing back the illicit wealth of Indians held in assets stashed abroad like Swiss bank accounts and funds in tax havens, had been quietly put to rest, with not even much lip service being paid to them. It was time for the government, in view of the impending elections, to do something spectacular for striking at “black money” to regain its credibility; and demonetisation was that something.

More substantial political economy explanations for demonetisation focus on the tendency under neo-liberalism of corporate capital, both domestic and foreign, to encroach upon the petty production sector, which under the earlier dirigiste strategy it was somewhat constrained from doing. According to this perception, demonetisation is a way of carrying forward this tendency in an extremely accentuated form, since its impact as we have seen, has been and will be felt very acutely by the informal sector. If “economic reforms” as currently understood entail inter alia a squeezing out of the petty production sector, then demonetisation carries that process of “reforms” forward by leaps and bounds. It is Modi’s way of demonstrating his commitment to big-time “reforms”. A variant of this argument states that the huge amount of cash that has come into the coffers of the banking system, which has had the effect of precipitating a crisis for the petty production sector, will now be available for loans to the corporate sector to enlarge its operations.

Credit: Youtube

Credit: Youtube

The problem with the above explanations is that while there may be some truth in each of them, none of them can explain the massiveness of the government’s action. In our view, this massiveness itself is what the measure aimed to project. It was not a means to an end but, to a large extent, the end itself. In other words, “rational explanations” of the government’s actions appear to be rather unconvincing because the measure was not taken as a carefully thought-out “rational measure” but as “shock and awe” tactics whose very negation of “rationality” was its rationale. Its aim was precisely to project the leader as an extraordinary person who can take such bold and unimaginable decisions. Indeed in a remarkable inversion of reason, the very scale of suffering of the people is adduced as evidence of his boldness; the fact that he could take such a harsh measure is supposed to demonstrate his unique qualities.

In short, “shock and awe” becomes its own justification; the very effort to explain “rationally” the demonetisation of over 86 percent of the currency of a predominantly cash-dependent economy is like chasing a will-o’-the-wisp, since what is supposed to commend it is its very “irrationality”. It is this fact, superimposed on the overall tendency under neo-liberalism to squeeze out the petty production sector, and the ideology that sees nothing wrong with such a squeezing out but rather commends it as part of a process of building a new “nation”, that perhaps explains the government’s extreme measure.

If the government was serious about combating “black money” in a rational manner, then it could have brought in several measures that would have been far more effective but far less spectacular, and of course far less economically destabilising. These measures that could address the problems of corruption and illicitly held wealth are indeed well known, and have even been outlined in previous official documents. The need is to have measures that hit the processes through which black money is generated and/or changes hands, not measures to just replace the notes involved in these transactions. Real estate transactions, for example, are the obvious but not sole means of generation and exchange of black money and they have to be a focus of attention. In terms of preventing the generation of black money, what is required is a more effective, clean and accountable tax administration that uses all the information at its disposal to go after those who are evading the law in various ways. For companies, it is possible to identify practices such as over- or under-invoicing, false transactions and attempts to use loopholes in the laws. For individuals, it is now easily possible to uncover undisclosed incomes by tracking payments and following suspiciously large purchases, and to put them under scrutiny. Obviously, movements of funds abroad is a major avenue, which needs to be monitored much more closely. Indeed, this is what most countries that are known to have relatively “clean” economic systems, do as regular practice, without making a great song and dance about it.

In terms of dealing with the assets held from undisclosed incomes, this too can be easily done if the government has a mind to do so. It is not just land deals and gold and jewellery purchases that can be monitored, precisely as the government is trying to do now in the middle of this cash crunch. The possibility of making investments in securities through tradable “Participatory Notes” in the stock market, which allows the  holder to conceal his/her identity, is an obvious means of parking illicit funds. These should obviously be done away with; yet both the previous UPA government and this supposedly anti-corruption BJP government have proved to be curiously reluctant to do so.

C.P. Chandrasekar. Credit:

C.P. Chandrasekar. Credit:

A major source of corruption in India is the current political system, with the opaque funding of political parties and a system of electoral spending that allows vast amounts to be spent unmonitored and prevents those without deep pockets from even participating effectively as candidates. Cleaning up the economy should really start with cleaning up the electoral system, forcing political parties to be transparent about all their sources of funding, and providing for state funding of elections. It has been persuasively argued that this would substantially reduce both the need and the capability for corruption at many levels. Yet, while this is widely recognised, it has remained at the level of pious platitudes rather than action for this government as well as previous ones.

One of the most obvious things to do – and the issue that Prime Minister Modi had continuously railed about in his electoral campaign speeches – is to go after those who have stashed away their undisclosed funds in bank accounts and other assets abroad. He had promised to “bring back” all this money, to the point that many holders of Jan Dhan accounts today still fondly believe that they will each receive around Rs. 15 lakh as their share of the returned money! Yet the Modi government has steadfastly refused even to divulge the names of such individuals, much less take any action against them. Other wilful defaulters are similarly being treated with kid gloves. The facility with which the king of defaulters, Vijay Mallya, was allowed to leave the country makes a mockery of the subsequent official noises made against him, which are made with the full knowledge that he will not be deported back to India by the U.K.

In short, the ill-conceived and poorly executed move to demonetise Rs.500 and Rs.1000 notes appears to be an attempt by the government to display a lot of sound and fury largely at the expense of everybody else, other than the corrupt and the criminal at whom it was ostensibly directed. It appears that this sound and fury itself is what was sought to be achieved; and the damage inflicted on the ordinary people in the process adds to this sound and fury, to give the impression that something grand is being accomplished “for the nation”.

This brings us to the question: why did so many people, including those badly affected by it, support this move? The answer perhaps lies in the fact that they too have been influenced by this inversion of reason, which is currently being spread in the country and which began some time ago with the apotheosis of a particular brand of “nationalism”. This brand of “nationalism” saw the “nation” not as being coterminous with the people, which had been the perception underlying the inclusive nationalism of the anti-colonial struggle, but as something that stood above the people and for which the people had to make sacrifices. The nation’s interest, according to this conception, lay not in making people better off, not in “wiping away the tears from the eyes of every Indian” as Mahatma Gandhi had put it, but in metaphysical objectives defined according to will by the ruling dispensation and the generally subservient corporate media; and the people were supposed to make sacrifices for achieving these metaphysical objectives without asking questions about whether the sacrifices were necessary or even effective at all. In fact, asking such questions itself tended to be deemed as “anti-national”.

This new “nationalism” seems to have captured the minds of middle and upper class India and even perhaps percolated to an extent to the deprived segments of the population. In this version of “nationalism”, while economic and foreign policies are subordinated to the requirements of the big powers, especially the United States, patriotism is supposed to lie elsewhere, in opposing “the other”, which is carefully kept distinct from the big powers and the corporate-financial oligarchy, both domestic and foreign, and which supposedly threatens “our nation” and “us”. The concept of the “other” keeps changing through time in accordance with the whims of the ruling dispensation.

Credit: Wikimedia Commons

Credit: Wikimedia Commons

In the case of the demonetisation exercise, its pursuit and defence has been given a “nationalist” hue by identifying the “other” as the corrupt and the criminal elements who are stealing from India’s poor. In fact, some of these elements, such as those infusing counterfeit notes into the system, are identified as forces financing terrorism aimed at undermining the Indian nation, and operating from across the border. It is projected that demonetisation will actually act against these elements (which we have shown is not the case, since they are largely unaffected by this exercise) and that no other methods were available to do this. Thus, advocating and defending demonetisation is presented as one’s patriotic duty, and failure to do so, and subjecting the measure to any rational examination, is labelled as constituting anti-national support for the corrupt and the criminal.

This state-driven narrative has obviously had an influence to an extent where many who have suffered damage as a result of demonetisation, still see their experience as necessary pain that has to be endured for realising long term gains for the “nation”. And many of them, finding it inconceivable that they could have been made to endure pain for no good reason, join in the applause for the leader who supposedly had the courage to hurt them so much for achieving some higher cause. In other words, the narrative that this move would actually serve to “cleanse” the economy and thereby put it in a stronger position for the future, even though it is false, appears to some extent to have captured the public imagination. The media – in both its more traditional and mainstream forms and the new social media – have played a part in spreading this false narrative.

Jayati Ghosh and C.P. Chandrasekhar are professors of economics at Jawaharlal Nehru University. Prabhat Patnaik is emeritus of economics at JNU.


    Very important book to understand the ‘ mystery’ behind demonetization and the popular perception. The policy has helped the paytm and other corporates to make profits from exploiting poor through transaction tax. The note ban has been carefully packaged in nationalism, patriotism, soldiers martyrdom and the black money recovery. This book adds to the understanding of the role of mass psychology diversion by constant propaganda

  • Jay293

    The economic benefits were dubious but political benefits were very clear. From the fact the not only the top tier leaders but all cabinet ministers and sundry second tier leaders were flying around in private planes and helicopters meant that the party was well prepared for the elections compared to the BSP, SP and the Congress. Where did all this money come from?

  • Rohini

    “The answer perhaps lies in the fact that they too have been influenced by this inversion of reason, which is currently being spread in the country and which began some time ago with the apotheosis of a particular brand of “nationalism””

    This sentence and the consummate garbage that follows it in the para where apparently, these three authors have decided that I, for e.g., who supported demonetisation, did so because my reason was ‘inverted’. This led to me be willing to make ‘sacrifices’ to achieve ‘metaphysical’ objectives which were decided for me by the ‘ruling dispensation and I follwoed like a mute dumb lamb ‘without asking anti-national’ questions. I also believed that doing all this was ‘nationalism’.

    Any wonder people like Ghosh are losing the plot? …Dear Jayathi Gosh and Company, I will tell you why I supported demonetisation – YOU will not tell me why I supported it. Ok?

  • Rohini

    Sir, as a humorous aside, I haven’t seen such a ‘telling’ comment in many days :-). I count three ‘tell’s in the very first sentence.
    When I counter a point in the article, must I read the book before I write about this article? Then why has the article been written – is it an advertorial for the book itself? I don’ think that was the intent of the Wire or of the article – they want readers to comment asap?
    As for the book:
    You say “However, an analytical view on the subject can offer some generalisations based on an understanding of political economy through some manner of study. ”

    That ‘manner of study’ is what I find questionable. And the analysis.
    I don’t know that any book that has been researched, written, edited and printed, by a bunch of authors in less than 3 months can really have any ‘findings’ on the economy post demonetisation. Any serious outcomes from this demonetisation exercise cannot possibly have been available, let alone studied, analysed and then printed in book form within 2 months..I mean….shrug! That must have been one super fast book! So, pardon me if its credibility is weak, in my eyes. That’s my analysis…based on some ‘manner of study’ as you say. 🙂