• The Reserve Bank of India board, which included the present Governor Shaktikanta Das as a director, had warned of short-term negative impact of demonetisation on the country’s economic growth and observed that the unprecedented move will not have any material impact on tackling the black money menace.
  • Curbing black money was one of the prime objectives of the shock move to junk old ₹500 and ₹1,000 notes, which saw 86% of high value currency going out of circulation.
  • It is a commendable measure but will have short-term negative effect on GDP for the current year.

  • Most of the black money is held not in the form of cash but in the form of real sector assets such as gold or real estate and that this move would not have a material impact on those assets.

  • The Prime Minister had announced demonetisation of high-value currency notes with the aim to curb the black money, check counterfeit currency and stop terror finance among others.

  • While any incidence of counterfeiting is a concern, ₹400 crore as a percentage of the total quantum of currency in circulation in the country is not very significant.

  • Of the ₹15.41 lakh crore worth ₹500 and ₹1,000 notes in circulation on November 8, 2016, notes worth ₹15.31 lakh crore came back during the 50-day window for depositing junk notes given to resident Indians, and till June 2017 for non-resident Indians.

  • Only ₹10,720 crore of the junked currency notes did not return to the banking system, rest 99.9% was deposited raising question mark over the government’s effort of curbing black money through the demonetisation.

  • The growth rate of economy mentioned is the real rate while the growth in currency in circulation is nominal.

  • Adjusted for inflation, the difference may not be so stark. Hence, this argument does not adequately support the recommendation (in favour of demonetisation).

  • The government has always maintained that the decision did not have much impact on the GDP growth.

  • The RBI has said it has no data on the old 500 and 1,000 rupee notes used to pay for utility bills such as fuel at petrol pumps — payments that are anonymous and are believed to have formed a good part of the demonetised currency that returned to the banking system.