Political Economy

Meera Sanyal on the 'Utter Disaster' That was Demonetisation

The architects of demonetisation accelerated the downward spiral in investment in the formal sector, mortally wounded those in the agriculture and informal sectors, caused innumerable job losses, and seriously impacted GDP growth.

A trenchant critic of the November 2016 demonetisation – when Prime Minister Narendra Modi declared that Rs 1000 and Rs 500 currency notes would no longer be legal tender – Meera Sanyal brought out a book length analysis of the “disastrous” move last November. The following are extracts from The Big Reverse: How Demonetization Knocked India Out, published by Harper Collins India.


There is no doubt that the PM touched a deep chord in the heart of India, when he talked of the menace of corruption. Who among us has not felt “Some people have misused their office for personal gain… that corruption and black money tend to be accepted as part of life… that it has afflicted our politics, our administration and our society like an infestation of termites…”

According to the 2017 Transparency International Corruption Perception Index (CPI) report, 73 per cent of the bribes paid in India were by “the low economy groups, who had to pay money due to unavailability of other options, or had less influence to avoid paying bribes… high bribes were demanded for accessing public education and healthcare facilities… approximately 58 per cent and 59 per cent bribery rates were seen in education and healthcare sectors in India, respectively. The times when people paid a bribe was also seen to be almost equally high for police, identification documents, and basic amenities.”

The PM’s promise that Demonetisation would eradicate corruption was undoubtedly one of the main reasons for the initial goodwill towards Demonetisation from the very poor, despite the hardships it inflicted on them. Sadly, however, this promise too was belied.

In February 2018, Transparency International reported that India continued to be among the most corrupt countries in the world. In the 2017 Global Corruption Perception Index report, India with a score of 40 points, was ranked 81, down two places from its ranking of 79 in 2016.

Worse still, the report named India as the most corrupt country in the Asia-Pacific region, with 69 per cent bribery rates, which means that almost seven out of ten people had to pay a bribe to access public services. Vietnam was the second-most corrupt country with 65 per cent bribery rates, whereas Pakistan with only 40 per cent bribery rates, ranked much better than India. Japan came out as the least corrupt nation, with a 0.2 per cent bribery rate.

This demolishes one of the main arguments presented in favour of Demonetisation. The Economic Survey for 2016-2017 had stated, “Across the globe there is a link between cash and nefarious activities: the higher the amount of cash in circulation, the greater the amount of corruption… In this sense, attempts to reduce the cash in an economy could have important long-term benefits in terms of reducing levels of corruption.”

As it happens, data does not support this argument. Japan is a case in point. Japan’s Currency to GDP ratio in 2015 was 18.61 per cent, much higher than India’s at 12.51 per cent. In the same year (2015) Japan was ranked as the 18th least corrupt nation in the world while India was ranked 76th, i.e. Japan, which has a much higher currency to GDP ratio than India, has far less corruption.

Clearly, therefore, Demonetisation failed in its second big goal — eradication of corruption. If anything, the new 2,000 notes made it simpler for corrupt officials to take and stash away larger bribes, compounding the problem for ordinary Indians.


The famous Chinese philosopher Lao Tzu is reputed to have said: ‘Governing a great nation is like cooking a small fish – too much handling will spoil it.’

The economic impact of demonetisation shows the truth of this statement. It was a totally unnecessary step which extracted a very high cost.

Instead of taking much needed steps to make it easier to do business in India, the government paralysed businesses with the chaotic demonetisation.

The experience of Malti, my micro-entrepreneur fishmonger friend, was multiplied millions of times across the economy. As cash was sucked out of the system, individuals started losing their jobs, faced losses in their farms, and had to shut down businesses, howsoever tiny. They became increasingly more fearful of the future, and in an attempt to conserve cash and preserve savings, they and their families reduced consumption.

As demand fell and people started to buy less, firms cut back on production, which led to lower capacity utilisation. Confronted with falling demand and overcapacity, business people in the private sector postponed or reduced their investment plans.

Unwittingly or otherwise, the architects of India’s 2016 demonetisation had accelerated the downward spiral in investment in the formal sector, mortally wounded those in the agriculture and informal sectors, caused innumerable job losses, and seriously impacted GDP growth.

As The Economist had pointed out: ‘India’s “Demonetisation” is a cautionary tale of the reckless misuse of one of the most potent of policy tools: control over an economy’s money… Managing an economy’s money is among the most important tasks of the government. Clumsy use of monetary instruments comes with high risk.’

By not recognising this risk, the NDA government caused a reasonably well-functioning economy to stop dead in its tracks. By not acknowledging the damage they had caused, and hiding behind a maze of confusing data, the government compounded the demonetisation error.

Since they refused to admit the blow that the economy had suffered due to demonetisation and remained in complete denial, they also could not take corrective actions to revive the economy. This state of denial, therefore, compounded one error with another, leading to a much slower recovery than would otherwise have been possible.