One of the primary campaign promise of Modi for the Prime Minister in 2014 was to get rid of India from its rampant corruption. There have always been talks of billions or perhaps a trillion dollars of black money (the untaxed money, often earned via illegal means such as bribes, kick-backs, smuggling etc.) is hidden in Swiss banks and private warehouses of corrupt politicians, businessmen and the elites. However, little was done to get that money back into the regular economy during the last 20 years of ruling (primarily by Congress but BJP also ruled 1998-2004). Modi even went so far in his campaign that he said he would bring all that black money into the economy and every citizen of India should expect to receive 1.5 million rupees deposited into their accounts within few months of his and his party (BJP) coming to the power.

Days, months and [two and a half] years passed and poor peoples’ hopes of getting the money deposited into their bank accounts finally started to dash away. Even Modi’s party admitted that it was only a poll promise, which is not unusual in India. Modi’s government did take some initiatives to give tax breaks to the people holding on to the stashes of money and some of the money held within Indian households did came into the economy. However, none of the black money held in Swiss banks came into the regular economy just as yet.

Finally, on November 8th, 2016, Modi announced his final draw to hit at the black money. He invalidated the Rs. 500 and Rs. 1000 currency notes (which accounted for 86% of total cash distribution within India) with only a 4 hours notice (announced that 8:00 pm that the said currency would be invalid past midnight). People started scrambling to figure out the impacts but still majority of the people supported the move, assuming that it will get rid of black money. Some critics were skeptical of the move that its real purpose was to hit the money stashed by other parties in UP (one of the largest and most politically powerful state) where the elections were due within next three months. Modi’s government gave people less than two months of time to exchange the old currency for the new one and estimated that a large part of the invalidated currency (about Rs. 15 trillion or US $220 billion) is held illegally and won’t show up to exchange for the fear of investigations. To touch the emotional chord, Modi’s government also claimed that a huge amount of such currency notes are fake, which are used to fund the terrorism activities in Kashmir and elsewhere.

The exchange counters setup within India (primarily the large national banks) were soon turned into chaos and confusion. The lines often extended into hours and in some places into days, the banks would run out of the new currency within couple of hours of opening and people had to return empty handed and come back the next day. However, people were still positive about the move as they were tired for decades of corruption and sought this as a one-time pain. The black money hoarders were quite during the initial week or so and Kashmir remained peaceful during the first week. This gave people boost that the demonetization policy was indeed working to solve the issues of black money and terrorism.

A unique situation arose for non-resident Indians (NRIs) or Overseas Citizens of India (OCI) who often travel to India for business or family reasons and they usually keep small Indian currency with them for convenience when they return from India. To give you a perspective, about 30 million NRIs and OCIs live and work abroad and assuming an average of just Rs. 1000  ($14) per person, the amount held comes out to be Rs. 30 billion (or $420 million). Even though Reserve Bank of India (RBI, the primary bank, responsible for country’s fiscal policies, including printing and distribution of money) stated that anyone living abroad should be able to exchange the old currency notes from the money exchange agencies (such as Thomas Cook, Travelex, etc.) often located in International airports within 72 hours. However, it seems that Govt. made no effort to inform such agencies and to convince then that the government would take back the large sums of money collected within these 72 hours. I personally called the agencies at the two International airports in Washington DC area the next day (within 24 hrs) and they told me clearly that they were not accepting invalidated currency. I then called several banks, including State Bank of India, who also refused the accept the currency. In the end, NRIs, OCIs and any other foreign national got stuck with the old Indian currency. As mailing the currency is illegal in India, USA and many other countries, the only option left was for someone to fly back to India and carry the currency with them. This too has a limit of Rs. 25,000 (US $350) per person by Indian customs and a return ticket to India costs about US $1000. So the Modi government left absolutely no practical legal option for people abroad with Indian currency. I know a lot of people gave the currency to some other people who were travelling but keep in mind that if they carried more than Rs. 25,000, then this was an illegal method. I personally decided not to follow any illegal method and only try the legal options to convert the Indian cash I had. NRIs and OCIs were still very hopeful, my own friends often trying to convince me that Modi is a very smart person and wouldn’t do anything stupid to provide no option to NRIs. I was sent the news links by some friends which said the RBI had extended the deadline for NRIs (those who were not in India during the period of Nov 8 and Dec 31, 2016) until June 30, 2017, which sounded very reasonable and good news to me and others stuck with Indian currency. I had my travel planned in February and thought I would have this good opportunity to exchange the old money. When I looked at the fine print, RBI said only five branches in India would allow the exchange, which was still OK as it covers the cities where major International airport are located. Then I saw another fine print that the scheme is only valid for Indian passport holders (apparently, NRI is defined as a person who is Indian citizen but usually lives and works abroad). Anyone holding non-Indian passports is currently at best considered as an OCI and the scheme is NOT open for OCI. I am an OCI and I still thought I would try it. At the Delhi airport, I went to customs officials and told them that I was bringing this Indian currency for exchange and completed the form required. They rejected my form and said I was not eligible for this as this is only for Indian nationals. Anyway, long story short, I am stuck with this Indian invalidated currency forever, which Modi government is perhaps counting as black money now!

Now coming back to India and the local people. The rich and the elites finally found their ways to avoid the long lines and to exchange the black money legally. They started clearing old debts and paying in advance to contractors and workers in the form of cash (Rs. 500 and 1000 notes, which could be exchanged for new until Dec 31st, 2016). Some even went a step further by asking poor people to deposit the “black money” into their respective accounts for small fees (5-10%). The lines to exchange money became bigger and bigger in most places (some claimed that there wasn’t any major problem in state of UP, where elections were due soon) and the country’s economy started suffering as there was very little cash available to do the trade. There were even some news of people having strokes while waiting in lines where government or the banks didn’t even make any arrangements to provide water. Most of the people admitted that the execution was flawed but still the majority was cheering that this would end the black money and corruption. Finally, the big day came and the exchange counters closed (except for the 5 centers setup for NRIs until June 30, 2017) on Dec. 31st. Reserve Bank of India (RBI) refused to provide any official figures on how much of the total old currency got deposited, perhaps for the fear of countering Modi’s claims that trillions of black money would get eliminated. Analysis of the RBI’s published data suggests that 96.5 percent of old currency has actually been returned to the system and still some more would get deposited by June 30th. Assuming this to be correct, only about Rs 450 billion (US $6.6 billion) of the “black money” got eliminated. This shows a practical failure of the primary purpose of invalidating the currency.

Now, let’s review government’s second purpose – eliminating counterfeits and thus reducing funding to terrorism. It was initially claimed that the new notes were nearly impossible to fake and the Rs. 2000 note in fact carried a GPS trackers. However, the counterfeits were in circulation even before the deadline of Dec. 31st approached. The terrorism activities in Kashmir also resumed normal pace after few days of lull. So you decide if this purpose was a success or a failure.

India’s own finance ministry admitted in the newly published Economic Survey 2016-17 that the demonetization caused short-term damage in the form of “job losses, decline in farm incomes and social disruption, especially in cash-intensive sectors”. The Survey is hopeful on achieving long-term benefits, such as “reduced corruption” and a more formalized economy, which could lead to a “greater GDP growth” and “greater tax revenues”.

Very little is talked about the cost of demonetization, beyond the inconvenience and lost time of billions of people. Before the announcement of demonetization, India’s GDP was expected to grow at 7.6 % rate by official figures and most of the international agencies agreed with that. However, the international watch-dog agencies have now forecasted a lower rate of growth, 6.6%, a decline of about 1% from the initial estimates. While Indian government does not agree to this lowered rate but we will know for sure by the end of 2017 as to how much was the real loss. The 1% rate decline translates to a loss of about US $22 billion (India’s GDP is about US $2.20 trillion). As I stated earlier, the gain from demonetization (even without offsetting including the costs of printing and distributing the new currency and shredding the old one) are about US $6.6 billion. So the net effect is a about a (projected) loss of about $15 billion in 2017 alone, the affects may stay long-term, slowing growth in successive years.

Having lost on two stated objectives of demonetization (black money and fake money/terrorism), the government has now started focusing on a third (newly invented) benefit – the demonetization will lead to cashless trade, which would increase the transparency and tax revenues. The data shows that the cashless transactions spiked during the Nov-Dec period but seem to be on decline now after the newly minted currency has become available. It is too early to say if the objective is met. Transparency International placed India at rank 76 out of 168 countries in its 2015 Corruption Perception Index, let’s see how much of this improves in 2017, which may in part be due to the demonetization.

Finally, I personally think that this initiative was good intentioned but government did not have clearly defined plans and the execution was poor at best. History teaches that people often respond negatively to forced decisions and perhaps the results would be better if government had devised some incentives for people to strive toward cashless and more transparent trade. Only the time will tell how the economy fares in 2017 and beyond. Even though majority of the Indians still seem to support the move, but the election results in five states (Punjab, Goa, U.P., Uttarakhand, Manipur) on March 11th will provide an initial test report on whether the Modi magic is working or fading away.