Demonetisation: Narratives & Failure

  • IASbaba
  • November 11, 2021
  • 0
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  • GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
  • GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 

Demonetisation: Narratives & Failure

Context: Popular narratives play a much bigger role in economic policymaking

Popular Narratives & Economic Policies

  • Narratives are often intertwined in the cultural belief systems of the society. They create myths which endure despite rational appeal to facts.
  • Thus, the Great Depression of the 1930s came to be associated with the excesses of the “roaring twenties”, though many economic factors were responsible. 
  • The Weimar hyperinflation of 1921-24 is so deeply embedded in the German consciousness, that even now, nearly 100 years after the event, German society treasures financial stability and distrusts public debt. 
  • Fiscal conservatism remains the dominant narrative and has inhibited the post-2008 recovery in Europe.

Demonetisation & Popular Narrative

The demonetisation of high-value currency in India in 2016 is a classic case of policy based on faulty narratives. 

  • The demonetisation story in India is based on popular myth that ill-gotten wealth is stored in stacks of currency notes and gold, hoarded in safes, boxes, or concealed cupboards. The dramatic action of demonetisation was considered powerful blow against this wealth because it was believed that this money was now rendered useless.
  • Such an action on black money was deeply satisfying psychologically as the narrative of black money is almost always in deeply moral terms. 
  • The narrative ignores the fact black money is not really kept in cash except in small quantities but mostly accumulated through real estate and other assets.
    • Although income from corruption or criminal activities is by definition black money, most black money is earned through perfectly legal activities though not declared to the tax authorities.
  • Also, the narrative included that such a measure will solve terrorism by stopping terror financing (old notes no more valid & terrorists cannot exchange it)
  • The way the narrative was framed made it hard for critics to explain their opposition. To denounce it outright would suggest that they have a vested interest in defending black money and corruption.
  • The narrative started to change the focus from black money and fake currency to digital/cashless payments, as time passes and it was realised that it was a failure. 
  • Appeals to nationalism and patriotism was also invoked to sustain the narrative.
  • The act (of demonetisation) was considered as an act of collective sacrifice. The people in long queues were reminded of the sacrifices of the soldiers guarding the nation’s borders and not to think of their own suffering.
  • The moral high ground claimed by the demonetisation narrative overshadowed the economic criticism of the policy and the observed reality.
  • Paradoxically, the failure of demonetisation policy does not appear to alter the narrative and, consequently, there is very little price to pay for its failure

Why is demonetisation considered as failure?

  • Demonetisation was done on two previous occasions, in 1946 and 1978, with poor results. But, unlike the limited impact of the previous events, the demonetisation in 2016 caused widespread disruption in the economy. 
  • Very little of 2016 demonetisation’s declared objectives — of eliminating black money, corruption, moving towards a “less cash and more digital economy”, or increased tax compliance — were achieved
  • Expectations of windfall gains of some ₹2 trillion-3 trillion failed to materialise as more than 99.3% of the cancelled notes returned to the banks. 
    • According to RBI report, after verification and reconciliation, the total value of the ₹ 500 and ₹,1000 as on November 8, 2016,  the day before note ban came into effect, was R₹15,417.93 lakh crore. The total value of the such notes returned from circulation was ₹15,310.73 lakh crore by August 2018.
  • If black money had existed as stockpiles of illegal cash, clearly all of it was very efficiently laundered.
  • By every measure, demonetisation as economic policy was a gross failure. But, as a narrative, it succeeded in creating a favourable or positive view of the policy. 
  • Despite personal hardship, long queues, and the loss of income and savings, there was a degree of ambiguity in criticising the decision. 
  • Most tended to distinguish the intention from the reality. That the policy was good but perhaps not implemented well seemed to be the main theme. 


  • It is clear that where narratives succeed there is very little political cost. A failed policy that carries no cost is likely to generate more such policies. 

Connecting the dots:

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