Opinion
Mint Explainer: What demonetization really achieved
Summary
- Note ban squeezed black money in real estate, but cash remains king
Let’s recall the lofty intentions behind demonetization. The primary objective was to suck out black money from the system and move India towards a digital super-highway where cash was no longer king. The attempt delivered on some counts, especially in real estate. And it may have paved the way for making the gold market more transparent too. Over the decades, many Indians have parked illicit cash in property and gold. Still, cash retains its popularity despite the emergence of digital platforms, and for a simple reason – it offers anonymity in financial transactions, unlike digital transactions which leave a trail.
The immediate impact of demonetization
The economic misery aside, almost 99% of the demonetized currency – or about ₹15.44 trillion – found its way back to the banks. Less than 1% stayed outside the formal banking system. Two factors may have contributed to the demonetization calculations going awry -- First, many Indians do not hoard black money in cash in big quantities, but instead prefer to park it in property and gold. Also, many Indians appear to have found people who didn’t have black money to convert their stash to white. So, black money was routed through different channels into the banking system, converting it to white money.
Does it mean that demonetization completely failed in its efforts to shrink the black market? Not quite.
The long-term impact on real estate
Demonetization has been a catalyst in making real estate deals more transparent. As cash deals reduced in the property market in the aftermath of demonetization, it capped speculative purchases and sales, and developers shifted their focus from luxury projects to affordable and mid-segment housing. It made the real estate market transparent and more end-user driven.
Property broker Anarock said in November 2021 that cash transactions in the primary residential market had shrunk. “Black money (or cash transactions) in the housing market has reduced by at least 75-80% since DeMo (demonetization) in late 2016," it said. Anarock data was based on discussions with developers across the top seven cities, home loan disbursal data of banks, feedback from its 1,500-plus sales agents and review of registration documents.
DeMo has changed the very fundamentals of real estate in India, it said, adding that “Housing sales happen because of actual demand, not as a means to launder black money." This trend has also picked up pace with the introduction of RERA and GST.
The impact of demonetization on the gold market has been less evident. Still, the government’s thrust on the digital economy paved the way for the emergence of digital gold after demonetization, a step towards making the gold market more transparent. A recent survey by consumer data intelligence company Axis My India showed there’s growing awareness about digital gold in India – 35% of the people surveyed were aware of it while 10% had already invested in it.
Why cash is still king
At the time of demonetization, India had banknotes of about ₹18 trillion in circulation. By March 2018, it had touched 19.4 trillion, and by December end 2022, that figure had crossed ₹32 trillion. So, cash with the public has surged after demonetization.
Clearly, despite the emergence of UPI and other digital platforms that ensure seamless transactions, cash has remained popular. The reason: Cash offers anonymity which digital transactions don’t. India – and the world – has long become used to the anonymity of physical cash transactions.
A digital currency – the digital rupee, for instance – that has all the properties of physical cash will have an immediate edge over other digital money platforms, particularly for high-value transactions. Currently, Indians use Paytm, Google Pay, PhonePe, and other digital platforms, for small-value transactions.
The RBI has assured that the digital rupee will mimic physical cash, including ensuring anonymity. While it could eat into the share of physical cash, particularly in big cities, it may take years for Indians to accept and trust transactions in e-rupee, particularly the promise of anonymity.
