The hoax of demonetization in Indian economy: a mathematical analysis
| DOI | https://doi.org/10.1108/JMLC-11-2018-0068 |
| Date | 07 October 2019 |
| Pages | 678-693 |
| Published date | 07 October 2019 |
| Author | Debasish Roy |
The hoax of demonetization
in Indian economy: a
mathematical analysis
Debasish Roy
Department of Management, Sikkim University, Gangtok, India
Abstract
Purpose –Over one and half years have passed since the demonetizationof Indian economy had occurred
on November8, 2016. The drastic step was initiated by the Prime MinisterNarendra Modi with an intention to
curb the “huge”circulation of illicit or “black”money of Indian economy by means of withdrawal of high
value denominationsof Rupees 500 and Rupees 1,000 from the supply of broad money (M3). This step helped
to demonetize around 86 per cent value of total money supply leading to an unprecedented chaos in the
economy and public life. The long delays in issuing fresh currency notes at the banks and ATMs further
deterioratedthe sudden economic crisis.
Design/methodology/approach –This research paper is aimed at exploringthe proclaimed “efficacy”
of demonetization policy as proposed by ReserveBank of India by means of a mathematical approach and
critically examinesthe effects of demonetization on the illicit money supplyof Indian economy on the basis of
macroeconomictheory.
Findings –From the mathematical model and related estimates, it may be easily deduced that the Indian
policymakersdeliberately hurled the masses in one of the gravest economic crises with a clear-cutintention of
creating a political gimmick, when in reality, the proportion of illegitimate money supply was not even 1
per cent of total legitimatesupply of money.
Originality/value –The analyses and findingsrelated to this paper are based on mathematical modeling
and logical interpretations. This paper is free of plagiarism as all the necessary sources and references are
properlycited.
Keywords Illicit nominal income (Y
L
), Illicit supply of money (M
I
), Legitimate nominal income,
Legitimate supply of money (M
L
), Velocity of circulation of illicit money supply (v
L
),
Velocity of circulation of legitimate money supply (v
I
)
Paper type Research paper
Introduction
Post-independence India’sfirst experience with demonetization was on January 16, 1978 when
the currency notes of higher denominations of Rupees 10,000, Rupees 5,000 and Rupees 1,000
by an ordinance of the President of India (Rajakumar and Shetty, 2016) with the identical
intention of eliminating “thepossibleuseofsuchnotesforfinancing illegal transactions”(RBI,
1977-78: 77). However, there was a major differencebetweenthedemonetizationdrivesof1978
and 2016. In 1978, only 0.6 per cent of high denomination notes were in circulation compared to
around 86 per cent in 2016 (Refer to Table I). Moreover, in 1978, about 45 per cent of the high
value notes for demonetization were with the banks and government treasuries as compared to
just Rupees 96,080 crore (approximately US$15bn for exchange rate of US$1 =Indian Rupees
64) or about 5 per cent of high value notes for demonetization were with the banks and
government treasuries in 2016 (Refer to Table II). Despite the claim of Reserve Bank of India
JEL classification –C30, C39, E26, E52, H11
JMLC
22,4
678
Journalof Money Laundering
Control
Vol.22 No. 4, 2019
pp. 678-693
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-11-2018-0068
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1368-5201.htm
Total notes as on
16 January 1978
(`crore)
(1)
Note tendered for
conversion to
RBI (`crore)
(2)
Amount passed for
exchange for lower
denomination (`crore)
(3)
Col (2) as %
of Col (1)
(4)
Col (3) as %
of Col (1)
(5)
Total value of HD notes 145.42 124.45 116.31 85.6 80.0
Of which held by
(1) Banks and
government treasuries 64.94 64.94 61.24 100.0 94.3
(2) Public 80.48 59.51 55.07 73.9 68.4
Public as % of total 55.3 47.8 47.3
Notes: HD notes refer to high denomination notes comprising `1,000, `5,000 and `10,000. Cols (2) and (3) are based on notes tendered for conversion to the RBI,
as on 30 June 1978
Source: Reserve Bank of India, Annual Report 1977-78, p. 38
Table I.
Profile of
demonetization in
1978 [in rupees crore
(’000, 0000)]
Hoax of
demonetization
in Indian
economy
679
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