A Case for “Soft Demonetisation” Now in India

The huge money in circulation is directly contributing to the generation of black money in the country and consequent hoarding of goods and properties as well as evasion of tax. 

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Prime Minister Narendra Modi in Uzbekistan is attending the Shanghai Cooperation Organisation (SCO) summit on last week. He holds a few bilateral meetings on the sidelines of the summit including the meetings with Chinese President Xi Jinping and Russia's Vladimir Putin [Photo: MEA India]

Prime Minister Modi launched massive demonetization measures in 2016, which was praised by the pledged admirers of Modi and criticized by the sworn critics of Modi. In any case, after a few years now, the overall view towards the demonetization strategy has changed, with the consensus view emerging that the objective of the demonetization measures was positive and well-intentioned, though the strategy for implementation could have been better fine-tuned.

The principal objectives claimed for the then demonetization measure was to eradicate corruption, eliminate black money circulation and identify and remove the fake currency.  Of course, it was even then said that the demonetization exercise was the first step to eradicate corruption and it would be followed by several other measures.

Now, after around six years of demonetization exercise, it appears that the situation is back to square one.

According to present data, notes in circulation in terms of volume rose to 13053.3 crore pieces from 9026.6 crore pieces between the end of March 2016 and March 2022.  Similarly, the value of the currency in circulation went up to Rs. 31.05 lakh crore from Rs.16.41 lakh crore.

Further, it is also reported that the counter currency seized in the country between 2016 and 2020 surged to over 8.35 lakh from 2.81 lakh.  The value of fake notes seized went up to Rs. 92.17 crores from Rs. 15.92 crores. Obviously, the benefits of the demonetization measure achieved in 2016 have been effectively undone now, by a huge increase in the volume and value of currency circulation in the country.

In recent times, there has been much-repeated news appearing in the media about the enforcement directorate and Income tax department seizing large value of currency notes during raids, which on several occasions exceeded more than rupees one crore in several such raids.

The huge money in circulation is directly contributing to the generation of black money in the country and consequent hoarding of goods and properties as well as evasion of tax.  The large circulation of currency is also one reason for enabling corruption at many levels in transactions.

During the demonetization discussions, the government said that rapid digitalization would eliminate cash transactions and curb corruption to a significant extent. While digitalization has taken place, it is still at an insignificant level compared to the overall transactions in the country today.  Perhaps, large currency in circulation has become a disincentive for digital transactions.

The huge currency in circulation could also be a contributor to the price rise and inflation in the country to some extent.

It seems that the government has indiscriminately printed currency notes in the country in the last few years in the post-demonetization period, to provide cash subsidies to the vulnerable section of society during the COVID period. This strategy appears to be short-sighted and counterproductive, as is evident from the consequences leading to the present fiscal situation in the country.

To curb corruption and black money and fake currency, what is urgently required is that the currency in circulation should be brought down steadily to the level achieved during the demonetization period in the year 2016.

Obviously, if the Government of India were to choose to reduce the currency in circulation, it would be scary to use the term demonetization, as the term demonetization has become controversial and much misunderstood now.

The government can still do it by resorting to what can be termed as “soft demonetization”, by slowly and silently reducing the high-value currency notes in circulation and not replacing the damaged ones and at the same time increasing the low-value currency notes such as Rs. 10, Rs. 20 and Rs. 50.

Of course, this would lead to complaints about a shortage of currency circulation in the market but this would force people and organizations to go for digital transactions in an increasing way.  Less currency in circulation will not and need not have an adverse impact, as digitalization which has already become a byword in the country will elegantly keep the economy moving in a much cleaner way than at present.

With the present Aadhar linkage in bank transactions and a greater amount of digital transactions, there would be a positive impact on reducing corruption in the country as well as black money generation and fake currency circulation.

 In effect, the difference between the 2016 demonetization and the soft demonetization suggested now is that all currency would continue to be legal tender and with much less currency in circulation, leaving no scope for “political controversy”.


N. S. Venkataraman is a trustee with the "Nandini Voice for the Deprived," a not-for-profit organization that aims to highlight the problems of downtrodden and deprived people and support their cause and to promote probity and ethical values in private and public life and to deliberate on socio-economic issues in a dispassionate and objective manner.

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