Just in case if you are wondering what’s a Limitless pill – then here’s a quick background. Limitless is a brilliant movie wherein a once mediocre wanna be writer is given an opportunity to gather his life again. He takes a pill which improves his brain activity enabling him to achieve all his dreams and desires – he completes his book, becomes healthy and wealthy etc. That’s the “Limitless” pill – a one stop solution for all your problems. I’ll leave you to find out the outcome of the writer for yourself.

Which problems demonetisation is trying to solve?

Before we move ahead let’s remind ourselves of the problems that this “novel” idea of demonetisation is supposed to solve. At 8:15 PM on 8th November 2016, PM Narendra Modi via a nationally televised address to the nation (which many claimed, was pre-recorded!!!) announced the demonetisation of ₹500 & ₹1000 Standard Bank Notes (SBN) issued by RBI. In doing so, PM Modi presented the following reasons behind such a “sudden & drastic” move:

fig1 fig2

Fig. 1 & 2: Government of India (GoI) stated motives behind demonetisation (9th November 2016)

In a nutshell, as PM Modi puts it, the demonetisation is a “historic” step to fight (a)corruption, (b) black money, (c) terrorism & (d) counterfeit (fake) currency. More interestingly, in the propaganda material (Fig 1&2 above) issued by the Finance and I&B ministry, one can notice few additional insights. In Fig. 1, Finance Ministry presents 4 key outcomes

  1. Opening new opportunities for poor, neo middle class & middle class – probably true to some degree as poor were finally getting an opportunity to use their redundant bank accounts opened forcibly by the same ministry!!!
  2. Real estate prices, higher education, healthcare to become more affordable for common citizens – none of this has happened & on the contrary, poor have been further deprived of these promises.
  3. Funding for terrorists, espionage & arms smuggling within India will end – since the announcement we have all seen how terrorists were caught with new currency notes. Rest is unclear yet.
  4. Circulation of counterfeit currency will end – forget professionals, there was a news of kids creating fake notes to purchase candies!!!!

It’s clear that none of the intended benefits as envisaged by Ministry of Finance have materialised yet. On the contrary opposite or worse has happened. Now let’s look at Fig. 2 wherein GoI via I&B Ministry accepts that

  • “incidents of black money are rising” – despite various amnesty (Fair & Lovely 😉) schemes in last 2 years and associated propaganda by government as well as BJP on the success of those schemes.
  • “the terrorists are using high denomination notes for hoarding black money” – probably India becomes the first country to expect terrorists to file IT returns 😂😂😂. The other interpretation of the 2nd statement in Fig.2 can be that “terrorists are expected to use SBN properly – not misuse” or “all those hoarding black money are terrorists”. Whichever interpretation you choose, it’s a mindboggling reasoning from GoI.
  • “fake notes promote anti-national & illegal activities” – as against expected goals of promoting economic growth? What’s anti-national doing there?

Enough of poking fun at “walked” & “talked” vernacular English!!! Let’s look at some of the most common theories put forward by various “experts” and “economists” in support of this exercise.

Theories promoted by experts & economists

As with every other initiative of this Modi administration, a huge propaganda machinery is engaged to mislead public opinion. It goes without saying that using lies, deceit & economical truth remains the mainstay of this propaganda machinery. Let’s examine some of the theories circulated by various “experts” & “economists” in support of this demonetisation exercise:

1.      The proportion of 500 & 1000 notes has suddenly increased

In the aftermath of demonetisation, the propaganda machinery using various mediums started floating rationales behind cancellation of ₹500 & ₹1000 SBNs. Many experts & economists as well as political commentators, especially from BJP, started portraying a picture that the % of high denomination notes has grown very high in recent years & therefore the corruption level as well as black money incidents have increased. Let’s first understand very clearly that RBI is responsible for issuing currency notes and not GoI. RBI decides on the quantum of currency notes and denomination based on the demand & supply calculations.


Fig. 3: Currency denomination balance (value %) in India (RBI records)

There is no correlation between the quantum of high denomination notes (HDN) and corruption or black money. As Fig. 3 highlights, the 3 biggest jump in proportion of HDNs happened during NDA1 – does that mean black money & corruption increased most during NDA1? In fact, the quantum of SBNs in circulation is completely independent of the government of the day and more closely related to the demand for currency from the market. You’ll also notice that growth of HDN as % of total currency in circulation has declined over last 15 years –

Period HDN avg. annual growth rate
FY15-16/FY11-12 1.29%
FY10-11/FY06-07 4.29%
FY05-06/FY00-01 6.28%

Table 2: Average annual growth in proportion of HDN in circulation

Data in table 2 above clearly proves that contrary to the propaganda by government machinery, the growth in proportion of HDNs has been declining over last 15 years. All those experts & economists trying to suggest that demonetisation of HDN is the right step because of growth in HDN is the main reason for growth in corruption & black money, are completely wrong. And if they insist on continuing to believe so then will they agree that most corruption & black money growth has happened during 2015-16? In Fig.3 above, you’ll notice that during 2015-16 RBI provided additional ₹2,151.37 billion (₹2.15 trillion or ₹2.15 lakh Cr.) currency in circulation out of which ₹2,003.07 billion (₹2 trillion or ₹2 lakh Cr.) was in HDN – a total of 93% of new currency was in HDN. Did Modi allow growth in corruption & black money under his governance?

2.      High denomination notes are being removed worldwide

Yet another argument floated by all the experts & economists supporting the demonetisation drive has been that central banks worldwide are removing high denomination currency notes. As a matter of fact, that’s entirely inaccurate. Barring ECB no other major central bank has any proposal to discontinue high denomination notes. Even in case of ECB, the €500 note will be discontinued from new issue effectively from 2018 but will remain a valid tender for a while and will be replaced with €200 note. Few jumped to asylum of recent spurt in notable calls for stopping $100 bill in USA. What many don’t realise is that under the Coinage Act of 1965, demonetisation is not allowed for any USA currency regardless of age. That means even if Feds stop printing new $100 bill, the current ones remain valid for ever. This is one of the reason why USA $ remains the most stable & preferred reserve currency.

Worldwide, the top 15 economies based on GDP have high & very high denomination notes (read more here). Let’s look at few major central banks data on denomination:


Fig. 4: Euro (top), Sterling Pound (left) & Swedish Kroner (right). (Respective Central Banks)

As you may notice, almost all of them have a healthy (big) % of HDNs. And these central banks are not contemplating demonetisation of HDNs. Instead they are pushing respective governments to improve vigilance and investigation mechanisms to tackle misuse of HDNs. There is a specific reason why I have picked Swedish Kroner to display here – will come to that later. Yes, there is an increased chatter about limiting the supply of HDNs to fight back large scale use in illegal activities such as drugs & terrorism. But that discussion is limited to global currencies that matter in such trade – US$, € or £. Do experts & economists using the global chatter of HDN as a refuge to justify demonetisation believe that ₹ is a much-used currency at international level?

Now some may argue that ₹ may not be used at global level but it is used in activities targeted against India. And they are right in their assertions but let’s not ignore the “value” aspect of the HDNs. In the case of £, € or $ the HDNs are worth a lot of purchasing power. For example, with a €500 note one can take a night at a reasonable 5-star hotel in Europe. Likewise, with 6-8 £50 notes, one can enjoy a wonderful night in Central London based reasonable 5-Star Hotel. How many ₹1000 notes will be required to rent a room in Indian 5-Star hotel? Now let’s look at petrol costs because that’s another standard commodity worldwide – with £50 one can get half a tank of fuel in UK (for car), with €500 4-5 full tanks & how many (car) fuel tanks will a ₹1000 note will fill? The reality is that having just a higher number doesn’t make a note HDN – it also needs to have relevant value (purchase power). In India, a ₹500 or ₹1000 doesn’t have the similar purchasing power as HDN in other major countries have. When the ₹1000 was reintroduced in 2000 or when ₹500 was introduced in 88-89, indeed they were HDNs with major purchasing power but can these experts & economists claim that they continue to hold similar purchasing power even today?

3.      Cashless economy is the future

The GoI throughout this demonetisation saga has continued to shift the goals (objectives) behind this exercise. The latest storyboard is all about “cashless” being the future. Hang on – did we not move from that to “less-cash”!!! Whichever way we look at it, the truth is that Indian economy has been practicing cashless transactions on a mammoth scale for decades. Cheques, debit & credit cards, online & mobile banking, IoUs etc. are all form of cashless transactions. As per RBI, India witnessed average 1.4 billion monthly cashless transactions during Q3 FY2015-16. Agreed, it is far too less – just 1 transaction per individual per month; but just imagine the scale & consider the difficulties one faces even at such low ratios.

Many have given example of Sweden as the cashless society but that’s not true. As per Swedish central bank, of the SEK1.2 trillion worth of transactions witnessed in 2015, approximately SEK180 billion (15%) was done in cash. The cash component includes only cash withdrawals at ATM and not the exact amount of transactions that happened using the withdrawn money. So even the beacon of hope for GoI’s mislead monetary policy initiative is not entirely cashless or less-cash.


Fig. 5 & 6: Swedish central bank data on transactions & FAQ on currency notes

It’s a similar story across all major developed economies, cash continues to remain a mainstay in economic transactions. Fig. 7 shown below presents a worldwide status on payment proportions.


Fig. 7: Proportion of payment systems worldwide (Raconteur)

One needs to understand that all these reports when they mention cash proportion they only refer to the amount withdrawn at ATMs or at banks. However, they completely fail to consider the “velocity of money” – the speed at which money changes hands. Basically when cash is withdrawn from bank, it usually changes hands multiple times before it again ends up in banking system. Sometimes it just doesn’t go back into banking system. Therefore it is not possible to track and report the exact proportion of cash transactions compared to cashless. On the contrary to GoI propaganda, there is growing resistance to cashless movement – simply because central banks in these developed countries are contemplating negative interest (you pay banks interest on cash in your account). And educated people in western world are fighting back against this dangerous move by limiting their spends on cashless (read cards). That’s one reason why card industry is spending over $3 billion worldwide to promote benefits of cashless but in reality they are promoting excessive usage of cards – in order to gain more profits. Google “cashless society dreams” and you will read thousands of articles on why the cashless drive is facing a gloomy future.

Is demonetisation really a limitless pill and do we need one?

The simple answer to both questions is: NO. None of the objectives of demonetisation have been realised. It has not solved any problems presented by the government. Instead it has created many more new problems and added to existing ones. Clear evidence available at everyone’s disposable. The bigger area to consider is whether we really need a limitless pill? There is a reason why central banks around the world continue to maintain reserves in multiple forms – cash, gold, forex & digital balance. And that reason is called “prudent risk management”. Putting all your eggs in single basket can expose you to extreme losses. We all practice prudent risk management in our lives – we have bank balance, deposits, gold, cash at home, home, land etc. where we store our wealth. Companies and banks do the same – they have multiple assets. Then why is Modi government so hell bent on putting all eggs in one basket – cashless society is neither ideal nor desirable. A cashless society infringes your privacy and your right to protect yourself from outside dangers. If all the money is digital then imagine how easy it’ll be to destroy it all in single keystroke or hold the economy to ransom by rouge elements.

Cash is not evil and neither the usage of it – the purpose can be but not the method. Also let’s not forget – all cash is not income and not all income is cash. We don’t tax people on cash, we tax people on income. So suggesting cash is cause of all evils (black money, corruption etc.) is like saying human body is cause of all diseases. Think about it – we fall sick because we have a body or because we don’t use the body properly?

By Tipus_sword (Follow me on Twitter – @tipus_sword)