The second demonetization in a few years in India: Effects and lessons for Albania

The second demonetization in a few years in India: Effects and lessons for Albania

When the demonetization policy (withdrawal of a currency, banknote, or precious metal from use) was implemented in 2016 in India it took everyone by surprise except the government and the Central Bank (Reserve Bank of India, RBI) [1].

The main goal was the fight against corruption and informality, and to make this goal applicable, 4 main objectives were set:

Fighting corruption at all levels of government
Prohibition of counterfeiting of money
Limitation of “black money” and its legalization as part of the formal economy
Preventing the use of informal money to finance terrorism

Meanwhile, after 7 years, the Reserve Bank of India (RBI) has published in May 2023 a Circular [2] for the withdrawal from circulation of the 2000 rupee note (entered the currency market in 2016 after the sudden withdrawal from the market of both Rs 500 rupee and Rs 1000 notes).

According to the RBI, this new monetary policy move reflects the central government’s lessons from the demonetization of 2016. Meanwhile, this new policy move is no longer the same as that of 2016, as signals have already been given to replace the note since 2019 when it was no longer printed, as well as already with the notification issued in May with an implementation deadline of the end of September 2023, all the holders of the Rs 2000 note are given the necessary time.

In Prime Minister Modi’s announcement in 2016 regarding the demonetization of Rs 500 and Rs 1,000 notes, his decision was seen as a political move rather than an economic one. The rationale behind this move was based on the promise to eliminate India’s black economy and with the 2017 UP elections approaching at the time, the party [3] was anxious to make a move [4].

According to the analyzes carried out [5] for the assessment of the positive and negative effects of the decision on demonetization, although much debated and massively opposed, it turns out that there were some promised and expected positive developments, such as:

First is the effect on increasing personal income tax collection. From the monitoring and evaluation carried out, there has been a significant increase in the number of individual tax returns filed after demonetization, confirmed by government reports.

Second was the achievement of the objective related to the prevention of black money. The government was able to identify more than 37,000 shell companies that were engaged in informal transactions and money laundering.

Thirdly, there was an increase in digital transactions, which increased by 50-55% since demonetization.

Fourth, a direct social effect was the reduction of criminal offenses surrounding human trafficking. According to Nobel Laureate Kailash Satyarthi and others fighting the menace of human trafficking in India, demonetization led to a significant decline in activities such as human trafficking and child trafficking by discouraging money laundering from these crimes.

Meanwhile, were noticed negative aspects such as:

– According to a report released by the Reserve Bank of India in 2018, approximately 99.3% of demonetised currency notes were deposited in the bank. This led analysts to conclude that this effort to curb the menace of black money from the market was not entirely successful in meeting its objectives.

– This hastily executed decision not only reduced industrial production, but also affected the GDP growth rate. A report by Azim Premji University also revealed that 50 million people lost their jobs since demonetization.

Another reaction that is worth including in the analysis is the reaction of politics, especially the opposition.

So, five years after demonetization, Congress leader Priyanka Gandhi asks, “If demonetization was successful, then why hasn’t corruption ended? Why has black money not stopped? Why has the economy not run out of dirty money? Why was terrorism not withdrawn? Why is inflation not controlled?” [6]

In response to these concerns expressed by the opposition, it should be mentioned that the reaction of government officials supports the final argument, that “it would be better to go to the beginning of the implementation and understand the context… The increase of currency in circulation in absolute numbers is not a reflection of reality. What needs to be considered is the currency to GDP ratio, which had come down after demonetization.”

Already in the new decision for yet another demonetisation process, but more succinct as well as announced in advance of time again the rupee depreciated in reaction to the RBI circular but soon strengthened against the US dollar.

Meanwhile, Finance Secretary Somanathan told BT TV that “Rs 2,000 notes have served the market need for the past 7 years and it is time to move to smaller denominations. Our aim is to encourage digital transactions.”

From all the Indian experience in these last 7 years, if we find any comparison between giant India, with an economic structure much more organized and productive than Albania, but taking as a basis of comparison the high informality, the problems of forgery of large banknotes , money laundering, as well as the risks of financing terrorism and maintaining a high level of motivation for criminals of all types, we think it is worth studying to approach the experience and evaluate a similar scenario in the conditions of Albania.

The Bank of Albania, which has already been placed under an increased focus of local expertise and of interest groups damaged by the fluctuating exchange rate, should analyze and discuss the necessary scenarios in meetings and collaborations with the Ministry of Finance and institutions subordinate to the Assembly of Albania.

Meanwhile, the Assembly Commissions themselves, such as Finance, Production Activities, Legal Affairs, and independent institutions, such as the State Election Commissioner, should be more interested than ever in opening initiatives and debates together with civil society and expertise. prominent local to discuss and build similar models of addressing the above problems, as it is seen that the government cannot address all the challenges related to acute political, economic, and social problems.

Thus, cash tends to be used more during election time, but election campaigns are unlikely to see any disruption despite the measures and programs the government adopts to combat informality and criminal black money.

Black money transactions remain a permanent risk of being used to ‘buy’ votes soon. A short-term solution is the adaptation of similar policies, such as: demonetization, or even the creation of a broad front and beyond the institutions related to the fight and the narrowing of informality and corruption by preventing money laundering with stricter measures. Another measure is to give up banknotes in large denominations, such as: 10,000 lek, as it is one more help in this very informal economy and held by criminal money.

Overall, the crime and corruption-free opposition, government, Parliament, and civil society do not appear to have much to lose, as there is room for more to be gained from a functional approach to demonetisation, along with other effective measures.

However, starting from the motive of demonetization, it is necessary to make exhaustive analyzes studying the effects in the conditions of Albania. The most direct impacts of demonetisation/different formatting will of course have an impact on cash-oriented sectors such as: agriculture, retail trade, services.
But this is a process that will not be done by surprise, as it will be designed in function of the big goal, that of cleaning the economy and the market from high dirt from informal money and discouraging criminals to find shelter freely in the Albanian economy even in the future.

What we should learn strongly from the Indian case is the conclusion that the decision of the politicians should keep at its core the broad consultation and factoring to have more economic logic than political expediency, although the latter will be like in the past even though no one will like this.



[3] Bharatiya Janata Party




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