Demonetisation of Rs 500 and Rs 1,000 – Post decision appraisal - T. N. Pandey

Demonetisation of Rs 500 and Rs 1,000 – Post decision appraisal - T. N. Pandey - Article published in Business Advisor, dated January 25, 2017 - http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume XVIII Part 2 January 25, 2017 3 Business Advisor
Demonetisation of Rs 500 and Rs 1,000 –
Post decision appraisal
T. N. Pandey
The demonetisation decision announced by the Hon‟ble
Prime Minister, Shri Narendra Modi, on 8th November,
2016, declaring that notes of Rs 500 & Rs 1,000 in
circulation at that date at 12 p.m. will cease to be legal
tender from the midnight of the said date and 50 days‟
time given for conversion of such notes physically into
new ones (up to 25th Nov., 2016) and through deposits
in the bank a/cs up to 30.12.16. This deadline having
been over, it is time to make a study of what has been
gained and lost consequent to such decision, the problems faced by the
people of the country by the unpreparedness of the Govt. and the RBI before
announcement of such far-reaching decision, affecting 125 crore population
in the country, non-clarity and confused thinking in the implementation of
the decision at Govt.‟s and RBI levels and various other aspects connected
with the same or incidental thereto and for judging the overall impact of
demonetisation. This is attempted in later discussion.
[2] Magnitude of the problem
According to RBI‟s data, the share of notes of Rs 500 and Rs 1,000 (the
latest available) in terms of Nos. and value as on 31
st
March, 2016 at the
time of decision making as published in the Economic Times of 22.11.2016
was as under:-
Denomination No (in lakhs) Value in crore of rupees
Rs 500 1,57,070 7,85,350
Rs 1,000 63,260 6,32,600
Total 2,20,330 14,17,950 or Rs 14.20 lakh in round figures
Thus, 86.4% of the total notes in circulation were withdrawn from
circulation by one stroke of the PM concerning demonetisation.

2. Volume XVIII Part 2 January 25, 2017 4 Business Advisor
[3] Return of demonetised notes to banks after being declared as illegal
tender
Complete official figures from the RBI are still awaited. According to a
declaration made by the RBI in early Dec., 2016, notes of the value of Rs
12.50 lakh crore had till then changed into new notes. Media reports show
that till the end of the notified period (i.e. 30
th
Dec., 2016), the total deposits
constituted nearly 14 lakh crores of old notes in bank a/cs and those seized
by the I.T. Dept. and other enforcement authorities. Thus, the estimate of
the Govt. that nearly 3 lakh crore will not come back and, to this extent, the
Govt. will benefit, has not fructified. Almost all the notes in circulation have
come back to the kitty in exchange of new notes and, to this extent, the
demonetisation exercise has turned into re-monetisati on, putting the
RBI to substantial additional work and cost and lot of inconvenience to
large number of common people.
[4] Objectives behind demonetisation
The objectives sought to be achieved by demonetisation, as stated from
Govt.‟s side could be summed up as under:-
*elimination of fake currency from circulation;
*put a check on terror financing;
*checking corruption & black money.
The same objectives were mentioned by the FM to RBI, intimating its
decision, seeking its views on demonetisation namely „to mitigate the
problem of counterfeiting, terrorist financing and black money.‟
[5] How far these objectives have been achieved?
*There does not seem to any noteworthy impact on fake currency.
Immediately after demonetisation, fake currency in the form of new notes of
Rs 2,000 started surfacing. A person was arrested with fake notes worth Rs
42 lakh in the form of Rs 2,000 new notes in Delhi just a few days after the
decision was announced. There have been many instances since then and
are continuing. Newspapers contain numerous instances of these. As an
instance, see the report in the Times of India (Delhi edition) dt. 11
th
Jan.,
2017, published in page 2 under the caption „teacher arrested for printing
fake notes‟, a report which shows that that the man designed fake notes
with face value of Rs 6.5 lakh using software like Coreldraw, Pagemaker and
Photoshop. He used high-quality scanners to scan the original note and
then made their replicas by printing it on both sides of an A4 size paper.

3. Volume XVIII Part 2 January 25, 2017 5 Business Advisor
The notes were then cut out in a makeshift lab. The instances of
counterfeiting notes through photo-scanning and other simple processes are
continuing on a large scale and the Govt. is apparently unable to effectively
check these practices. Hence, the objective of checking the fake currency
has not been achieved in any significant way.
*Demonetisation does not seem to have impact on checking terrorist
activities also. Immediately after 2-3 days of issue, new notes of Rs 2,000
were found with a terrorist, who was shot down by security forces in J&K
State. There is no official account to support that the demonetisation has
impacted the control of terror activities in any big way. Rather, these seem
to have increased in J&K State more after demonetisation.
*Similarly, in checking corruption also, the demonetisation does not seem to
have impacted much. Persons have been arrested, taking bribe in new
currency notes of Rs 2,000. Similarly, nearly 95% of the demonetised notes
are reported to have come back in the system by way of deposits of old
notes. This shows that either there was not much of black money in the
form of Rs 500 & Rs 1,000 notes, which was intended to be tapped by the
process of demonetisation, or people have proved to be more smart and they
have gathered alibis in support of the notes converted into new ones or
deposited in banks. The media reports, at the time of writing this piece,
show that a sum of Rs 3.40 lakh crore was deposited in bank through
demonetised notes and Rs 80 crore loan of banks was repaid through such
notes. Thus, the three main objectives for demonetisation do not seem to
have been achieved.
*Yes, the demonetisation resulted in promoting cashless economy. This has
been achieved in a big way. The report in the Times of India dt. 10
th
Dec.,
2016 shows that the achievement in this direction has been substantial as
could be seen from the following table published in the paper:-
[5.1]Currency gains

Transactions Nov. 8 Dec. 7 % growth
(Dec. 7/Nov.
8)
Rupay cards
(eComm+POS)
No. (lakhs) 3.85 16 316

4. Volume XVIII Part 2 January 25, 2017 6 Business Advisor
Value (Cr) 39.17 236 503
e-Wallets No [lakhs) 17 63 271
Value (Cr) 52 191 267
UPI Value (Cr) 1.93 15 677
USSD Number 97 1,263 1,202
Value
[lakhs]
1 14 1,300
Oct
Avg
Nov
Avg

PoS No. [lakhs] 50.2 98.1 95
Value (Cr) 1,221 1,751 43
[Source: Ministry of Electronics & Information Technology

[5.2] The position has further improved after 10
th
Dec. Govt.‟s
demonetisation move and the subsequent cash crunch has led to a surge in
digital payments. According to the Govt. data, the number of daily
transactions through e-wallet services such as Oxigen, Paytm and MobiKwik
have been up from 17 lakh – recorded on Nov. 9 when demonetisation was
announced to 60-63 lakh as on Dec. 7 (a growth of 271%). In terms of value,
the surge has been 267% from Rs 52 crore daily to Rs 191 crore.
Transactions thru Rupay Cards (e-commerce and point-of-sale) were up
316% at 16 lakh daily (3.85 lakh on Nov. 8), while in terms of value, the
growth has been 503% at Rs 236 crore from Rs 39 crore. The Govt.,
however, did not provide a break-up of transactions conducted in urban and
rural/semi-urban areas. The Govt. and digital payment companies expect
the trend to stay strong at least till easy availability of cash. The trend got a
boost after FM, Arun Jaitley‟s announcement of a slew of incentives for
digital payments. The surge has been encouraging and in line with the
Govt.‟s thinking of promoting digital transactions „to drive in honest,

5. Volume XVIII Part 2 January 25, 2017 7 Business Advisor
accountable and transparent‟ payments, said Ravi Shankar Prasad, Minister
for Electronics and IT. With digital transactions, money will come into the
system; it will be accountable, generate tax and help develop the country‟s
economy. When money will come into banks, the Govt. will be able to come
up with better welfare schemes, Prasad said. The Govt. has doled out a
number of sops for consumers when they make payment s digitally. These
include discounts on purchase of fuel and payments for insurance and at
toll plazas. Service tax has been waived on digital transactions for
purchases up to Rs2,000, while charges on transactions through feature
phones have also been cut.
[5.3] The PM, Shri Narendra Modi, can claim credit for such substantial
increase in popularity of cashless transactions because of demonetisation.
[5.4] Besides the above, i.e. increase in digital deals, there have been some
other gains also consequent to demonetisation. Briefly these are stated in
later paragraphs.
[6] Other benefits
[a] Flow of idle money lying in safes/ strong rooms of the persons to the
Central economy. The sum of nearly Rs 14 lakh crore coming back in the
economy is a healthy feature. It is likely to increase much more after RBI‟s
examination. Even if 25% of it represents hoarded money in 500 & 1,000
notes, the economy would be benefitted to this extent and this money will
lead to increase the productivity, employment and growth. According to the
FM, increase in national wealth and better rolling out of money can lead to
reduction in tax rates also. Further, considerable notes are being seized by
I.T. authorities and other enforcement authorities. This also ensures more
money in the economy.
[b] Cash flow of substantial funds to the banks can lead to lower interest
rates for borrowers from the banks. This has already started and many
banks have lowered the lending rates. However, this can affect the interest
on fixed deposits, which too are expected to be reduced. This will have
impact on pensioners and senior citizens. However, the PM, in his 31
st
Dec.,
2016 broadcast to the nation, has compensated such loss to certain extent
by announcing 8% deposits (up to Rs 7.5 lakh) for such persons on 10-year
deposit. This may partially help such segment of population.
[c] Decrease in criminal activities because of lesser availability of funds with
people.
[c-i] A report in the TOI dt. Dec. 10, 2016 indicates the following position:-

6. Volume XVIII Part 2 January 25, 2017 8 Business Advisor
Some crimes nosedive as cash stays out of pockets
The ups and downs

Crime heads 2015 2016
Kidnapping for ransom 1 0
Abduction 40 26
Murder 49 44
Attempt to murder 66 36
Robbery 561 315
Rape 156 151
Gambling 89 77
Burglary 1075 1136
Vehicle theft 2884 2988
Other theft 4823 6757
Drug peddling 16 24

Murders have shown a dip of 10.20% & robberies by 43.85%. Kidnapping
and abduction have also dipped by 14.46% and 35%. Crimes against women
have also been reduced, though not rapes.
[d] According to the Central Agencies report, the call traffic between havala
agents, which are traditionally in cash, have dropped almost by half, post
demonetisation.
[e] Organised stone pelting in Kashmir and paying for ground terror
supporters in the State has gone down because of cash crunch.

7. Volume XVIII Part 2 January 25, 2017 9 Business Advisor
[7] Adverse impact of demonetisation
There have been umpteen adverse impacts on common ma n and economy.
Some of these are briefly stated in later paragraphs.
[A] On common people
[a] Misery of lower and middle income group persons
The lower and middle income group persons, agriculturists, daily earners,
salaried employees and pensioners have been worst hit by the
demonetisation because of shortage of new currency notes, checks in the
amounts that can be withdrawn from their a/cs and ATMs, rush in banks
and ATMs (long Q‟s became a routine affair during 50 days of
demonetisation). Amounts regulated like to Rs 24,000 in a week from bank
a/cs and Rs 2,000 from ATMs on one occasion were not getting disbursed
because of shortage of new notes or non-functioning of most ATMs
consequent to technical reasons or as a result of non-availability of cash in
them. A reality survey made by a TV channel – News 18 India – sometime
back showed the following position regarding ATMs:-
[a] No. of ATMS checked – 2858
[b] No. of ATMs found working – 1039
[c] No. of ATMs found non-functional – 1819
[d] Percentage of non-functional ATMs to the number surveyed – 63%
[e] No. of ATMs found working – 37%
[a-i] These figures amply show the difficulties faced by the common people
in getting their own money from banks and ATMs even to the extent
prescribed, who, according to PM are, are honest persons.
[a-ii] Even the money disbursed was in notes of Rs 2,000, which were not
helpful in getting day-to-day needs because smaller value notes to be given
in return were in short supply.
[a-iii] Shocking situations
However, common people died while standing in queues, while coming to
banks/ATMs by heart failures because of strain by long hours of standing in
lines – not getting the money from banks for performing obligations for
children, like marriages, etc. Media reports also show that 120 people died
in this process of withdrawing money from ATMs and after such ordeal,
what they got were one or two notes of Rs 2,000 from ATMs and at the most

8. Volume XVIII Part 2 January 25, 2017 10 Business Advisor
12 notes of Rs 2,000 from their a/cs in a week, but new notes were
available in abundance with tax evaders and persons of unscrupulous
values as could be seen from the following report in TOI of 10
th
Dec., 2016.
[a-iv] No money at ATMs and limited notes in banks but lots being seized
Over a month after demonetisation, despite cash being in short supply
thanks to limited printing of new notes and curbs on withdrawals,
authorities have made huge seizures of the new currency notes of Rs 2,000
and Rs 500.
Dec. 9 – 72 lakh – Dadar (Mumbai) – 17 lakh (Islampura) – Gurgaon – 76
lakh – Surat (Gujarat)
Dec. 10 – 10 crore – Chennai (TN) & 40 lakh (Hoshangabad) (MP)
Dec. 7 – 1.5 crore (Goa) and 71 lakh (Udupi) (Karnataka)
Nov. 29 – 1 crore – Coimbatore (TN)
Nov. 23 – 10.6 lakh – Gujarat satellite area
Nov. 20 – 8 lakh – Sabrakantha (Guj.)
[v] In Chennai, Rs 10 crore in 2000 rupee notes were seized from a
businessman. He had 50,000 notes of Rs 2,000 on him against the
withdrawal limit of Rs 24,000 or 12 notes of Rs 2,000 per a/c per week.
[vi] The ED has seized Rs 93 lakh in new currency in Karnataka as part of
its money laundering probe.
There have been more seizures after Nov. 20 (supra). The total of new notes
seized till 10
th
of Dec., 2016 from all over the country is reported to be of the
magnitude of Rs 300 crore. Thus, while common man suffered, there is no
control in movement of such currency to undeserved persons in a big way.
There can be no worse situation of failure of the Govt. authorities that while
the common people were struggling for a few new notes, some persons even
dying in such exercises, these were having free flow for tax evaders, black
marketers and other persons of questionable means as is revealed from
searches and seizures by the Income Tax and other regulatory authorities
also. There can be no worse situation than this. The persons involved in
providing new notes in substantial quantities to the above-mentioned
categories of persons, including bank personnel, need to be detected and
severely punished to provide fear for others not to engage in such nefarious
activities.

9. Volume XVIII Part 2 January 25, 2017 11 Business Advisor
[B] Impact on various sectors of economy because of demonetisation
[a] GDP
According to the RBI Governor, growth rate for the economy may have to be
cut to 7.1% from 7.6% estimated earlier because of slowdown consequent to
demonetisation. It is estimated that it may fall below this figure. World Bank
pares India‟s growth of declining trend forecast for FY 2017 to 7% from
7.6%.
[b] Impact on long term basis
[i] Real estate
City markets have been hit badly. Demand for residential space will
contract, especially in micro markets. Capital values as well as the price of
land are also going down. The impact will be negative.
[ii] According to a private survey, India‟s manufacturing contracted in Dec.,
2016 as cash crunch due to demonetisation hurt demand as well as output
in the first month of ban on old high denomination notes. This trend is to
continue for some time.
[iii] Diamonds & Gems – Very negative impact
Cash is the lubricant here. The hardest hit will be on the cutters and
polishers, who work on the lowest operating margins. Demand for gold
might pick up in the long term. But it appears that the small jewellery
retailers are taking their last gasps.
[iv] Cement – Impact negative
The industry depends heavily on the real estate sector (60-65% of
consumption) and will feel some of the pain of lower demand in the short-
term.
[v] Consumer durables – Impact neutral
With about 75% of purchases in cash, demand will sag in the near future
but, in the long run, people are expected to switch to transparent modes of
payment. Hence, the demand may pick up later.
[vi] Retail – impact neutral
Malls and shop owners have been complaining of lower footfall and this is
true right now, but in the long term, customers may return and demand will
pick up as smaller shops get wired to the cashless economy. High end

10. Volume XVIII Part 2 January 25, 2017 12 Business Advisor
luxury goods retailers will find fewer people willing to make expensive
purchases from disclosed sources.
[vii] According to a report in the Economic Times dt. 11.01.2017, home sales
may shrink 23% because of demonetisation.
[viii] Steel
This too depends on heavy customer demand in the real estate sector (30-
35% consumption). Expect demand to be affected though not too badly, in
the short term – impact negative.
[ix] Banks & NBFCs
Benefits in increased savings. Banks with digital platforms will benefit from
new traffic as will payment banks – impact positive.
[x] E-commerce
Likely to have some adverse impact. The cash on delivery segment has been
hit and this could dent sales of e-commerce firms. Some estimates say the
adverse impact could be as much as 25% to 30%.
[b-i] Impact on short-term basis
This is likely to be negative. Position regarding 3 sectors as stated later.
[i] Automobiles
Demand for fancy vehicles will fall as part payments were often made in
cash. Two-wheeler demand to be marginally impacted. A report in the
Economic Times dt. 11.01.17 shows that auto sales in Dec. skid by 18.66%
(average) in passenger vehicles, commercial vehicles, three-wheelers and
two-wheelers.
[ii] Aviation
The world‟s fastest growing aviation market could see a slowdown as people
shun air travel. Traffic growth could be hit significantly.
[iii] Tourism
The holiday season is likely to be hit with some trade experts saying travel
companies could be affected by 10-15%.
[Source: Care, Crisil, CMIF]
[8] SC considering the issues concerning demonetisation

11. Volume XVIII Part 2 January 25, 2017 13 Business Advisor
The matter reached the apex court through a series of PILs filed by
advocates and cooperative banks. The Govt. at the outset opposed such
petition on the ground that the apex court cannot decide the fiscal policy of
the Govt. and dictate what should be done and what not. The Govt.‟s case
was that the situation is getting better and it will normalise after Dec. It
posed the question as to which farmer poor person has come to the court
asking for relief or complaining about non-availability of cash. Most of the
PILs are filed by lawyers and cooperative banks. Do lawyers represent the
people?
[8.1] The court did not accept such contentions posed by the AG on behalf
of the Central Govt. and proceeded with the hearing.
The court‟s comments came as the Centre said deposit of old notes had
touched Rs 12 lakh crore till date but resisted the SC‟s attempts to tweak
the withdrawal limit to provide relief for harassed citizens by asking, „Can
you tinker with fiscal policy?‟
The hearing was adjourned to 15
th
Dec. on which date the court contested
the Govt.‟s claim that there is no cash shortage in banking system. The
court observed that the Govt. is not able to secure cash to common people
but there are some people, who are able to get so much money in new
currency (referring to money seized in searches).
[8.1(a)] An issue was raised during the hearing that the old notes should be
continued to be used for the purposes for which they were permitted to be
used beyond 15
th
Dec., 2016, the court expressed no view on this. The CJ,
however stopped short of passing any orders granting interim relief to
ordinary people inconvenienced by lack of cash. The SC, however, suggested
that the Govt. should make a plan on how best to disburse new currency as
it was running short on this front. It has limited new currency and a large
number of claimants. Have a policy on who will be given and how much
been drawn, the CJ said. Under court prod, the AG said the Govt. would
permit cooperative banks to deposit Rs 8,000 crore collected by way of old
Rs 500 & Rs 1,000 crore pan India, in the first two days after
demonetisation with the RBI.
[8.1.(b)] With the above observations, the case was closed for hearing. The
judgment was pronounced on the next day i.e. on 16
th
Dec., 2016. The
important aspects emerging from the judgment are:-
*The Bench referred to a larger 5-judge Bench the batch of petitions,
challenging the demonetisation.

12. Volume XVIII Part 2 January 25, 2017 14 Business Advisor
*Whether the exemption period (on using old notes) should be extended or
not must be best left to the judgment of Govt. with a hope that it will be
responsive and sensitive to problems encountered by common man.
*Stayed all proceedings going on in different courts against demonetisation
and restrained all courts from entertaining plea against the demonetisation
– the matter being before the SC.
*Directed the Govt. to issue notification to let district cooperative banks
exchange Rs 8,000 crore in old notes from RBI.
*The CJI-led Bench framed nine questions for the constitution of 5-judge
bench, which will go into the legality of the demonetisation decision. The
questions are:-
*Whether demonetisation notification dated 8
th
Nov. violates the RBI Act.
*Does notification contravene provisions of Article 300(A) of Constitution
dealing with right to property?
*Assuming that the notification has been validly issued under the RBI Act,
whether it violates constitutional provisions.
*Whether the limit on withdrawal of cash from banks has no basis in law.
*Whether implementation of policy suffers from procedural and/or
substantive unreasonableness.
*Does it suffer from excessive delegation of legislative power?
*What is the scope of judicial review in matters relating to fiscal and
economic policy?
*Whether a petition by a political party on the issues raised is maintainable.
*Whether district cooperative banks have been discriminated against by
excluding them from accepting deposits and exchanging demonetised notes.
The issues framed are quite valid but the decision, which is likely to come
after some months may prove to be of academic interest as by that time the
exercise of demonetisation may be over. However, if the court decides that
the demonetisation exercise is invalid, it would be a great embarrassment
for the Govt.
[9] Jandhan a/cs – game spoilers
The Jandhan a/cs opened with great fanfare to bring into the poor/middle
income group and rural people in the banking network even by accounts

13. Volume XVIII Part 2 January 25, 2017 15 Business Advisor
with zero balance or with a rupee or two, about which the PM spoke in
various forums as a successful achievement of his Govt., have proved to be
game spoilers. Initiated in Aug., 2014, by now nearly 26 crore such a/cs
have been opened with deposits of Rs 45,630 crore up to 8
th
Nov., 2016,
when demonetisation decision was announced. With this announcement,
these a/cs have been used as conduits for converting unaccounted income
in the form of Rs 500 & Rs 1,000 notes in new notes and before the misuse
was detected, nearly Rs30,000 crore was already deposited in such a/cs
mostly in Rs 2.5 lakh lots. Though the Govt. has announced that stern
action, including imprisonment up to 7 years, will be taken under the I.T.
Act and Benami Transactions law against the persons, who have misused
such a/cs, it is well said than done, considering the enormousness of the
a/cs and legal and procedural aspects involved in taking legal actions. With
the help of such a/cs, considerable unaccounted income in the form of old
notes will get legitimised with Govt. merely getting bogged down in tackling
legal and procedural problems for long time.
[10] Later developments
In the foregoing discussion, an account of the functioning of demonetisation
scheme and issues connected with or incidental to it have been stated up to
Dec., 2016. There could be no two views on principle underlying
demonetisation scheme. However, there has been terrific unpreparedness
and mess-up in implementing the scheme because of unpreparedness on
the part of RBI and the Govt. (Finance Ministry), the scheme, which could
have been a success if planned well, got bogged down in correcting the
deficiencies, which could not be perceived before announcing the scheme.
Rather, the exercise was undertaken hurriedly. This led to the issue of
umpteen corrections/clarifications (about 59 or 60 during the currency of
the scheme). Some such instructions/orders/clarifications are mentioned in
later discussion.
*Nov. 11 – Govt. Depts. allowed to draw cash beyond Rs 10,000 with written
justification.
*Deadline for use of old notes at pumps extended to Nov. 14.
*Nov. 13 – Limit on exchange of old notes raised from Rs 4,000 to Rs 4,500
per day, daily ATM withdrawal limit from Rs 2,000 to Rs 2,500, no daily
limit on withdrawal from banks, weekly limit of Rs20,000 increased to Rs
24,000.
*Business correspondents‟ limit of dispensing cash raised to Rs 2,500.

14. Volume XVIII Part 2 January 25, 2017 16 Business Advisor
*Nov. 14 – Deadline on use of old notes at petrol pumps extended again to
Nov. 24.
*District Central Coop Banks allowed to let customers withdraw money from
accounts up to Rs 24,000 per week up to Nov. 24.
*Current accountholders operational for 3 months or more allowed to
withdraw up to Rs 50,000 per week.
*Banks asked to enhance limit of micro ATMs/bank mitras to Rs 50,000.
*ATM charges on all transactions from Nov. 10 to Dec. 30 waived off.
*Nov. 15 – Bank cashiers told to use indelible ink to identify those, who
have already exchanged cash once.
*Nov. 16 – Anybody depositing over Rs 50,000 in account to submit PAN
details if account not seeded with PAN.
*Nov. 17 – Old notes exchange limit reduced to Rs 2,500 per day.
*Nov. 18 – Merchants allowed to enable withdrawal facility up to Rs 2,000
per day at PoS.
*Nov. 21 – Overdraft & cash credit a/cs allowed to withdraw up to Rs
50,000 in cash per week.
*Small borrowers given extra 60 days for certain kinds of loans, where dues
were payable between Nov. 1 & Dec. 31.
*Withdrawal of Rs 2.5 lakh allowed for marriages on or before Dec. 30. But
person withdrawing cash to produce list of those to be paid.
*Farmers & traders registered with APMCs or mandis allowed to withdraw
up to Rs 25,000 per week from loan or KYC-compliant a/cs.
Nov. 22 – Those withdrawing Rs 2.5 lakh for marriage spend need to provide
list of those being paid Rs 10,000.
*Limit on prepaid payment service providers like PayTM enhanced from Rs
10,000 to Rs 20,000.
*Nov. 23 – Old notes‟ deposits not to be accepted in small saving schemes.
*Nov. 24 – Old note exchange to stop after midnight of Nov. 24. Deposits to
continue.
*Use of old Rs 500 notes allowed at fuel pumps till Dec. 15.

15. Volume XVIII Part 2 January 25, 2017 17 Business Advisor
*Nov. 28 – Money deposited in new notes allowed to be withdrawn beyond
the limit of Rs 24,000 per week.
*Nov. 29 – Monthly withdrawal limit of Rs 10,000 imposed on Jandhan
a/cs. Bank managers allowed to permit higher withdrawals on KYC-
compliant a/cs after determining it is genuine and documenting it.
*Dec. 1 – Use of old Rs 500 notes at petrol pumps, etc., advanced to
midnight of Dec. 2.
There have been similar instructions in Dec., 2016 too, practically up to the
last date of the duration of the scheme. A very surprising instruction was
issued by the RBI post 15-12-2016 to the effect that the demonetised notes
remaining after 15.12.16 could be deposited in the bank a/cs only once in
the remaining period up to 30.12.16. This was totally contrary to the PM‟s
unequivocal declaration on 8.11.16 that the old notes could be changed into
new ones up to 30.12.16 and thereafter, at the specified offices of the RBI
up to 31.03.2017. Here again, the RBI has issued a notification to the effect
that after 30.12.16, notes could be changed up to 31.3.2017 only by NRIs or
persons, who were out of India during the period 8.11.16 to 30.12.16 and
not anyone else. Both these decisions of the RBI are, prima-facie, against
the commitments given by the PM, which the RBI is not entitled to pass over
by its decisions. The first instruction of one-time change up to 30.12.16 was
withdrawn but the second one (notification) relating to changes from
31.12.16 to 31.03.2017 (in certain cases up to 30.6.2017 also) still stands,
which puts many small savers unaware of the notification, in quandary,
who believed that they could change the old notes into new ones up to
31.03.17 as declared by the PM are now finding themselves cheated as they
depended on the PM‟s assurance that they could do so up to 31.03.17. The
PM‟s declaration on 8.11.16 reads as under:-
“There may be some, who for some reasons, are not able to deposit their old
five hundred or one thousand rupee notes by 30.12.16, they can go to
specified offices of the RBI up to 31.03.2017 and deposit the note after
submitting a declaration form.”
Closing the window for persons, who believed on PM‟s assurance, is breach
of his assurance. Despite this, the FM seems to have washed his hands
saying that after 30.12.16, the issue regarding change of old notes into new
ones has to be decided in accordance with the instructions of the RBI. This
situation is a classic example of lack of coordination between the PM, the
FM and the RBI and suffering of the people because of mess at their end.

16. Volume XVIII Part 2 January 25, 2017 18 Business Advisor
[11] Demonetisation had been a tale of hurried haphazard and confused
decision
The later discussion supports the view mentioned in the title of this para. In
a 7-page note to the Dept. related Committee on Finance of Parliament, the
RBI has disclosed the following facts:-
[i] RBI agreed to demonetise Rs 500 & Rs 1,000 notes on the advice of the
Union Cabinet received by it on 7.11.16, asking it to refer such proposal for
its Central Board‟s consideration.
[ii] On 8
th
Nov. itself, RBI‟s Central Board approved the proposal.
[iii] The Union Cabinet, headed by PM, met within hours of the receipt of
approval from the RBI and immediately thereafter the PM announced about
the note ban on 8
th
Nov. itself in the evening.
[12] Decision-making process
The note also shows the backdrop of the decision-making process as under:-
“On May 27, RBI proposed to the Govt. that new series of bank notes with
new design, colour and denomination need to be introduced.
*On June 27, the Govt. gave approval and presses were advised to start
production of new notes.
*The RBI justified the issue of new notes saying that it had been working on
introduction of new series of notes with improved security features to secure
them against counterfeiting (not as a measure to check terror financing or
black money). These seem to be after thought to justify demonetisation. As
stated in earlier discussion, none of these objects seem to have been
achieved.
*On the day demonetisation was announced, the RBI had merely 4.94 lakh
crore of new Rs 2,000 notes as against notes of the value of Rs 14.20 lakh
crore in circulation.
[12.1] Hurry in the issue of new notes led to imperfect printing of notes, in
some notes, the picture of Mahatma Gandhi was blurred, in some only one
side of note was found printed, in some the ink on the note was blurred and
various other such defects.
[12.2] No commentary is needed to justify the observations made in the title
of this paragraph. The foregoing discussion and that contained in paras 1 to

17. Volume XVIII Part 2 January 25, 2017 19 Business Advisor
9 amply support the observations made in the heading. To support these,
the following further aspects can be mentioned:-
[a] RBI is an autonomous body, created under the Reserve Bank of India
Act, 1934, inter-alia „to regulate the issue of bank notes and keeping of
reserves with a view to securing monetary stability and generally to operate
the currency and credit system of the country to its advantage ….‟ Thus,
demonetisation could not have been ordered without the concurrence of the
RBI. The RBI has to be the decision-maker in this matter.
[b] The management of the bank is to be in the hands of Central Board of
Directors (Board for short), headed by the Governor, RBI. The Central Govt.
has been, u/s 7(1), given the powers to issue such directions from time to
time as it may, after consultation with the Governor of the Bank, consider
necessary in the public interest. Subject to such directions, the general
superintendence and directions of the affairs of the Bank is to be
determined by the Board.
[c] The foregoing account from the RBI‟s Act makes it clear that the Central
Govt.‟s directions to the Bank are to be examined by the Bank‟s Board to
examine, inter-alia, whether the same are:-
*in public interest;
*the consequence of the directions;
*whether the Govt. and the RBI are well equipped to deal with the aftermath
of the directions of the Govt. on such a large scale.
*the cost benefit analysis of the implementation of directions.
[d] Apparently, the examination of the aforesaid aspects could not have been
possible by the Board within the short time of a few hours available to it
since the directions were received, examined and approval communicated.
Prima facie, the Board, it is said with respect, made a short haul of a long
exercise and just put its seal of approval to a decision without examining all
pros and cons of its decision-making. To this extent, the credibility of the
Bank and its autonomy seem to have been compromised for no rhyme or
reason.
[e] The Govt. too does not seem to have studied the aftereffects of a major
decision having impact on nearly 125 crore population of the country, its
economy, its image outside the country and similar other aspects.
[f] Thus, the conclusion that decision regarding demonetisation was reached
hurriedly and haphazardly is well supported. That it was resorted without

18. Volume XVIII Part 2 January 25, 2017 20 Business Advisor
preparedness and without any regard to the consequences to follow is well
supported by discussion in paras 1 to 9 (supra).
[13] Concluding comments
There have been problems for the masses by demonetisation without
preparedness as demonstrated earlier in the write-up. The worst-hit are
persons with limited means like the poor and middle class people, salaried
employees, pensioners, etc. The later categories of persons could not draw
their salaries and pensions credited in their a/cs despite being in queues for
days together. Sr. citizens have to specially face inconvenience by standing
in queues for their pensions and still not getting the requisite money. Many
of them fainted and fell down while in the queues. Such persons were put to
great hardship in running their household affairs. Domestic helps do not
have bank a/cs or ATM cards. They generally get their payments in cash
but could not get the same because their masters did not have the requisite
cash. Small vendors were greatly impacted as in the absence of cash
liquidity, purchasers preferred to go to malls, where payments could be
made by cards. Farmers have not been able to sell their crops and in the
absence of adequate cash, could not purchase seeds, fertilisers, hire labour
for sowing operations. Their perishable crops got rotten because of lack of
funds with the purchasers. Daily-wagers had to return to their villages in
the absence of work in cities. GDP growth and many sectors in the economy
are in a setback situation.
[13.1] People in the country have shown great patience to put up with such
inconveniences and believed in the promise of PM that good days are ahead.
But, there does not seem to be any visible silver lining for improvement in
the near future. The PM asked the people to wait for 50 days, which period
is already over, with not much easing of situation in banks and ATMs.
According to the PM himself, normalcy may not come within 50 days‟ time
limit as asked for. This is clear from two statements made in Panaji (Goa)
and Banaskantha (Gujarat) in the context of people‟s woes felt consequent
to demonetisation, which are reproduced below:-
Nov. 13, 2016
Agar 30 December ke baad koi meri kami reh jaye, ko gaiti nikal jaye….aap
jis chaurahe mein khada karenge, mein khada ho ke desh jo saza kahega
who bhugatne ke liye tayyar hoon….30 Decmber ke baad aap ne jaisa
Hindustan chaha hai mein dene ka vada karta hoon. [If there is any
shortcoming on my part after Dec. 30, I am ready to face any punishment
that the country deems fit….after Dec. 30, I promise to give you the
Hindustan you desire]

19. Volume XVIII Part 2 January 25, 2017 21 Business Advisor
PM in Banaskantha (Guj.) on Dec. 10, 2016
Pachas din ke baad aap bhi dekhenge ki dheere, dheere,
dheere….paristhithi sudharti nazar aayegi”. [After 50 days, you will see the
situation improve slowly, slowly, slowly].
[13.2] Thus, there are no prospects (as was expected) of situation improving
even after expiry of 50 days (on 30.12.16). The position is expected to
improve slowly, slowly, and slowly, as stated by the PM. How long the people
can be deprived of their own money?
[13.3] The country and its people have been thrown in turmoil with no
prospects of fast recovery in the near future. People had to stand in long
queues for getting rationed amount of currency while wads of new currency
got passed on to tax evaders, manipulators and persons of unscrupulous
means. People can suffer for the good of the country, but not for the
inefficiency and lack of foresight/ unpreparedness on the part of the Govt.
There could be no justification for declaring demonetisation before having in
store new currency, if not up to 100% of what was being turned into
„worthless pieces of papers‟, at least, up to 50% or 60%.
[10.4] Peoples‟ patience cannot be taken to be limitless. If they are exposed
to constant hardships with no expectation for change for the better in the
near future, it could be breached and as cautioned by the SC, it may lead to
riots and create law and order problems. Steps need to be devised to find
solutions to the problems thrown by the sudden declaration of
demonetisation. People cannot be kept hungry for days on the promise that
they will get sumptuous meals with no time indicated for that.
[10.5] People want to know what has been achieved by demonetisation and
whether the pain suffered by them will not go in vain. A White Paper on this
from the Govt.‟s side needs to be issued urgently.
P.S.
After the article, as above, was written and sent, an important event of the
People want to know what has been achieved by
demonetisation and whether the pain suffered by them will
not go in vain. A White Paper on this from the Govt.‟s side
needs to be issued urgently.

20. Volume XVIII Part 2 January 25, 2017 22 Business Advisor
Governor of RBI meeting the Parliamentary Standing Committee on Finance
on 18
th
January, 2017 has been reported in the print media in the next
day‟s papers. The aspects, which could be of interest in the context of the
article sent earlier, are as under:-
*Rs 9.2 lakh crore of new notes have been issued so far after
demonetisation.
*The Governor did not specify a timeline for lifting restrictions on cash
withdrawals [limits of withdrawal from ATMs and from current a/cs have
been increased from Rs 4,500 and Rs 50,000 to Rs 10,000 and Rs 1,00,000
respectively. Strangely, the limit for withdrawal from Savings Bank A/c
continues at Rs24,000 a week].
*No figure regarding the number of notes and their value, out of
demonetised notes, which have come back, has been stated because “the
process of arriving at a figure is still on”. This number, it was said, would be
intimated at a „future date‟.
*Media reports show that the total currency in circulation rose by Rs 52,790
crore in the week ended 13
th
January, 2017. RBI‟s data indicates that this
amount is just 53% of the currency level of Rs 17.97 lakh crore when
demonetisation was announced on 8
th
Nov. by the PM. At that time, the
value of notes of Rs 500 & Rs 1,000 in circulation was estimated at about
Rs 15.44 lakh crore.
(T. N. Pandey is Former Chairman, Central Board of Direct Taxes.)