On November 8, 2016 at 8.15 pm, Prime Minister Narendra Modi announced the demonetisation of high denomination (Rs.1000 and Rs.500) currency notes. They would no more be legal tender. The stated goal was to extinguish black money. Shock and panic set in and rumours started doing the rounds. Like, new notes to be issued would have a chip embedded in them so as to track them and that people were burning their illegal hoards of money.Now Andhra Pradesh Chief Minister Chandrababu Naidu has proposed demonetising the Rs 500 notes. Even if this is not pursued, uncertainty in the minds of the public would arise and that would impact the economy just as it did ten years back.But did demonetisation achieve its goals in 2016 and would it do so now?In 2016, I was in the United States, giving talks on the black economy in India. While watching President Donald Trump gaining a lead over former senator Hillary Clinton in the US elections, I started receiving calls from India asking about the implications of demonetisation for India. I was stunned. I had written on it since 1985 and had argued that while this step would not check black income generation, it would damage the economy.The earlier demonetisation in 1978 in India had no impact on black income generation. Then the high denomination notes (of Rs 1,000, Rs 5,000 and Rs 10,000) in circulation were worth Rs 165 crore, 0.6% of the total currency in circulation. Rs 135 crore of them were returned.Also read: Ten Years on, the Note Ban Remains India’s Biggest Policy Blind SpotMost people had at the time not even seen such high-value notes. But in 2016, the high-denomination notes constituted 86% of currency in circulation in value terms and their sudden withdrawal was going to make transactions in the economy difficult, especially since there was little preparation for such a catastrophic step.Most ministers, bank chairpersons and senior bureaucrats heard of it as the PM announced it. So, banks and ATMs were ill prepared to dispense new cash and shortage of cash ensued. Secrecy was supposed to prevent black money hoarders from liquidating their hoards. The public accepted this logic and celebrated the attack on ill-gotten money. The ruling party benefitted from this misperception in the elections held soon after.Mistaken premiseThe premise underlying sudden demonetisation was that ‘black means cash’ – a fatal flaw in the understanding of illegitimate wealth. It followed that people believed that if cash was squeezed out of the economy, black money would disappear.But cash is a stock, a part of the portfolio of assets held by an individual. It originates from the black incomes generated annually – a flow. So, even if black cash could be somehow squeezed out of the system, the flow of such incomes would continue and black cash would soon get regenerated. The demonetisation policy thus confused stocks for flows.Black incomes are generated via under- and over-invoicing of revenue and costs. Demonetisation does not stop this process. RBI admitted that 99.3% of the high denomination currency notes issued had returned to it. The remaining 0.7% of the notes were in Nepal, Bangladesh, Dubai, or with the elderly, and so on.So, the Rs 3 to 4 lakh crore of black cash which it was thought would not return also came back. The expected windfall gain to the government did not materialise. Old notes got changed to new notes through bribes and discounts. The old Rs 1,000 note was initially exchanged for Rs 700, etc.Economy damagedCash is a token used for circulation of goods and services. If it is not available, circulation stops. If customers cannot pay for a good or service, nor can they buy it. Demand in the economy declines and production gets hit. Mandis, malls and shops emptied out in those days. Fruits, vegetables and flowers rotted in the field. Milk and tomatoes were thrown on the roads.While the organised sector of the economy could partially manage using electronic and bank transactions, the unorganised sector working in cash could not. Even beggars did not get alms as people did not want to part with small cash. The organised sector also faced demand shortage. For instance, luxury car sales dropped. And companies hired extra warehouses as inventory piled up.Watch: ‘Demonetisation Has Been Very Bad for the Indian Economy’The unorganised sector had no money to pay wages and buy raw material. As they closed down, employment fell and workers milled around at labour chowks waiting for work. This was found to be true even in March 2017. People queued up at banks, marriages and medical treatment got postponed.In brief, output and employment fell drastically for five months of 2016-17 and the economic growth rate dropped drastically.Unfulfilled goalsDemonetisation could not curb black economy. If that had happened, the direct tax-to-GDP ratio would have risen sharply, but it has hovered around 6%. The other goals announced by the PM – checking counterfeit currency and terrorism – remain unfulfilled.Officially, counterfeit currency was only a few hundred crores (0.002% of total currency in circulation). Demonetisation to check it was like swatting a fly with a sledge hammer. Besides, terrorism is not just financed using counterfeit currency but also through hawala, narcotic drug trafficking, gun running, etc., and all these have continued.Within days of November 8, 2016, the government shifted the goalpost and claimed the aim had been to bring about a cashless economy. At the time of demonetisation, currency in circulation was Rs 18 lakh crores, and which has increased to Rs 43.5 lakh crore – both are about 12% of the GDP.The economy has not even become a “less cash” economy despite the dramatic rise in digital transactions. A more honest economy such as Japan has a cash-GDP ratio of 18.5% compared to Nigeria’s ratio of 1.5%. So, the size of the black economy does not correlate with cash use.Decision makingDemonetisation failed because it does not eliminate the mechanism for generating black income. To tackle it, accountability of the ruling party is required and that has little to do with the extent of cash in the economy or the denomination of the currency notes.Demonetisation sent a robust economy into a tailspin and those who never generated black incomes were hit the hardest. Further, even the higher denomination Rs 2,000 note was introduced. Due to the failures of demonetisation, the ruling party stopped claiming that demonetisation was an achievement.Also read: Withdrawal of Rs 2,000 Note Shows India Is Still Feeling Effects of Modi’s Tughlaqian DemonetisationThe obvious lesson is that decision making requires wider consultations. Not only demonetisation, the sudden lockdown in 2020 and the structurally faulty GST implemented in 2017 were also misconceived. All of them have damaged the unorganised sector. This is continuing with the push for organising the unorganised sector, which can only turn the small farmers and owners of small businesses into workers because of the tiny scale of their operations.If successful, given how mechanised and automated the organised sector is, few new jobs will be created while a large number of jobs will disappear. As the unorganised sector declines, it will aggravated unemployment – and then there is the looming AI challenge.Clearly, a decade later policy makers have yet to learn the obvious lesson from demonetisation.Arun Kumar is a retired professor of Economics at JNU. He is the author of Demonetisation and the Black Economy (Penguin Portfolio, 2017).