Demonetisation: Watershed moment in India’s economic history, says Nirmala Sitharaman

By Nirmala Sitharaman

This government, under the leadership of Prime Minister Narendra Modi, was voted to power with a strong mandate for eradicating black money. The BJP election manifesto of 2014 stated clearly: “BJP is committed to initiate the process of tracking down and bringing back black money stashed in foreign banks and offshore accounts.” The first decision that this government in 2014 took was to set up the Special Investigation Team as per a Supreme Court order which had by then waited years.

As an emerging economy, one of the distinct yet worrying feature of India’s economy was its highest usage of cash. A 2015 report by a top accounting firm said that in India “98% of all transactions by volume happen in cash. 68% of the total value of transactions are conducted in cash.” Another global auditing giant estimated the size of the shadow economy, a byproduct of a cash economy, at 26% of the country’s GDP. Simply put, over 25% of the Indian economy was unaccounted for, and therefore, untaxed too.

The RBI’s annual report 2016 mentioned that by value counterfeit notes of Rs 500 and Rs 1,000 accounted for more than 92% of all fake currency as traced by all our banks. Post demonetisation, there is an increase of 20% in the number of counterfeit notes detected compared to the previous financial year. Now the high denomination notes, in value, are down to Rs 6 lakh crores, a decrease of nearly 50%.

The flow of money to terrorists and naxalites are severely choked. In their desperation there are attempts at looting banks in the Kashmir Valley. The cash reserves of the terrorists have become toxic resulting in a reduction in the number of stone-pelting incidents. They have fallen from a high of 2,683 between November 2015-October 2016 to 639 in November 2016-July 2017.


Again, thanks to demonetisation, data now shows that almost 99% of cash is back into the banking system. Rs 16,000 crores did not return to the banks. Not all cash returned to the banking system can be claimed as white. Cash deposits worth Rs 3.68 crores and over 23 lakh accounts are now under scrutiny. Through advanced data mining and analytics 17.73 lakh suspicious cases were identified whose cash transactions did not match with their tax profiles.

It is a stunning fact that about 1.5 lakh people deposited a total of Rs 5 lakh crore; a third of all currency deposited. In other words, 0.00011% of India’s population deposited nearly 33% of the total cash in the country! Undisclosed income worth Rs 29,213 crore was detected and admitted.

Tax compliance has significantly increased. New taxpayers’ numbers have gone up by 26.6%. In 2016-17, this number stands at 84.21 lakh. Simultaneously, the number of e-returns filed also has gone up by 27.95%. Hawala transactions and huge numbers of shell companies are detected. 2.24 lakh companies are now deleted. These shell companies owned several accounts, deposited and withdrew large amounts during the demonetisation.

One such a company was found to have more than 2,000 bank accounts. Over 58,000 bank accounts belonging to 35,000 companies have exposed that Rs 17,000 crore was deposited and also withdrawn after the announcement on demonetisation. It is noteworthy here, that in one case, a company which had a negative opening balance on November 8, 2016, deposited and withdrew Rs 2,484 crore after that date!

It is important to recognise the behavioural shift which was induced and subsequently encouraged by the government towards a less-cash society. There has been a 58% increase in digital transactions between August 2016 and August 2017.

Some may criticise the government, wrongly, saying that this was not the original intent of demonetisation, there can be no doubt in anyone’s mind that digitisation and giving identity to every transaction only makes our economy cleaner and transparent.

Demonetisation is a watershed moment in India’s economic history. In the long term, the impact of demonetisation will certainly be the transformation of the Indian economy into a more formal and transparent economy.

As if recognising this intention the people of India were stoic in the way in which they went about their daily lives, even amidst the shortterm difficulties they had to endure.

Unfortunately, some of the Opposition parties went to the extent of putting their own negative thoughts in the citizen’s minds only to be rebuffed. BJP’s electoral victories subsequently, be it in UP or in the various panchayat and local bodies of MP, Maharashtra and Rajasthan, only show how the people of India have appreciated the intention behind demonetisation. The Opposition parties stand exposed for where their sympathies rest in this battle against black money and corruption.