Demonetisation – From a closely guarded secret to facts that went into the decision

The plan to demonetise rupee 500 and rupee 1000 bank notes was kept highly confidential.

New Delhi: The plan to demonetise rupee 500 and rupee 1000 bank notes began six to ten months prior to its announcement on 8 November 2016. However, it was kept highly confidential. Revenue secretary Hasmukh Adhia and five others privy to the plan were sworn to utmost secrecy.

They were supported by a young team of researchers working in two rooms at Modi’s New Delhi residence, as he plotted his boldest reform since coming to power in 2014.

The secrecy was aimed at outflanking those who might profit from prior knowledge, by pouring cash into gold, property and other assets and hide illicit wealth.

The cabinet was informed about the demonetisation on 8 November 2016 in a meeting called by the Prime Minister of India Narendra Modi which was followed by Modi's public announcement about the demonetisation in a televised address at 8 pm.

Within an hour into the speech, Modi, in his TV address to the nation, cautioned that people could face temporary hardship as replacement 500 and 2,000 rupee notes were introduced. Calling for an act of collective sacrifice, he promised steps to soften the blow for the nine in 10 Indians who live in the cash economy.

After Modi's surprise televised address to the nation, the Reserve Bank of India Governor Urjit Patel and Economic Affairs secretary, Shaktikanta Das explained in a press conference that one purpose of the action was to fight terrorism funded by counterfeit notes.

The move to demonetise old currency was praised by the then President Pranab Mukherjee terming it a “bold step” of the Union government “which will help unearth unaccounted money and counterfeit currency.” He called upon people not to panic and follow government guidelines for exchange of Rs 1,000/500 notes.

The government replaced old Rs 500 notes with new ones, but no replacement for Rs 1,000 notes have been made. Instead, a new Rs 2,000 note was introduced post note ban.

On 28 December 2016, the Cabinet approved promulgation of an Ordinance to make possession of a large number of scrapped banknotes a penal offence that will attract monetary fine.

The Specified Bank Notes Cessation of Liabilities Ordinance makes holding of old 1,000 and 500 rupee notes after March 31 beyond a threshold amount a criminal offence that will attract a monetary fine of Rs 10,000 or five times the cash held, whichever is higher.

The announcement caused chaos, with huge queues forming at banks when they reopened after a short holiday.

While some advocate said that the scrapping of the banknotes will bring more money into the banking system and raise tax revenues, millions of Indians were furious at having to queue for hours outside banks to exchange or deposit their old money.

The Reserve Bank, which had for long shied away from disclosing the actual number of junked currency deposited after November 8 last year, said in its Annual Report for 2016-17 in August that Rs 15.28 lakh crore of the junked currency had come back into the banking system, leaving only Rs 16,050 crore out.

As on November 8, 2016 there were 1,716.5 crore pieces of Rs 500 and 685.8 crore pieces of Rs 1,000 in circulation, totalling Rs 15.44 lakh crore.