2016 Indian banknote demonetisation

Background

The Indian government had demonetised bank notes on two prior occasions—once in 1946 and then again in 1978—and in both cases, the goal was to combat tax evasion by "black money" held outside the formal economic system. In 1946, the pre-independence government hoped demonetisation would penalise Indian businesses that were concealing the fortunes amassed supplying the Allies in World War II. In 1978, the Janata Party coalition government demonetised banknotes of 1000, 5000 and 10,000 rupees, again in the hopes of curbing counterfeit money and black money.

In 2012, the Central Board of Direct Taxes had recommended against demonetisation, saying in a report that "demonetisation may not be a solution for tackling black money or economy, which is largely held in the form of benami properties, bullion and jewellery." According to data from income tax probes, black money holders kept only 6% or less of their wealth as cash, suggesting that targeting this cash would not be a successful strategy.

On 28 October 2016 the total banknotes in circulation in India was ₹17.77 trillion (US$260 billion). In terms of value, the annual report of Reserve Bank of India (RBI) of 31 March 2016 stated that total bank notes in circulation valued to ₹16.42 trillion (US$240 billion) of which nearly 86% (around ₹14.18 trillion (US$210 billion)) were ₹500 and ₹1,000 banknotes. In terms of volume, the report stated that 24% (around 22.03 billion) of the total 9.26 crore banknotes were in circulation.

In the past, the Bharatiya Janata Party (BJP) had opposed demonetisation. BJP spokesperson Meenakshi Lekhi had said in 2014 that "The aam aurats and the aadmis (general population), those who are illiterate and have no access to banking facilities, will be the ones to be hit by such diversionary measures."

In June, the Government of India had devised the Income Declaration Scheme, that lasted till 30 September 2016, providing an opportunity to citizens holding black money and undeclared assets to avoid litigation and come clean by declaring their assets, paying the tax on them and a penalty of 45% thereafter.

Procedure

The plan to demonetise the ₹500 and ₹1000 bank notes began six to ten months prior, and was kept highly confidential with only about ten people aware of it completely. The logistical processes and preparations for printing the new ₹500 and ₹2000 bank notes began in early-May. The cabinet was informed about the demonetisation on 8 November 2016 in a meeting called by the Prime Minister of India Narendra Modi which was followed by Modi's public announcement about the demonetisation in a televised address.

Televised address

On 8 November 2016, Prime Minister of India Narendra Modi announced the demonetisation in an unscheduled live televised address to the nation at 20:15 IST. In the announcement, Modi declared circulation of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series as invalid effective from the midnight of the same day, and announced the issuance of new ₹500 and ₹2,000 banknotes of the Mahatma Gandhi New Series in exchange for the old banknotes.

After Modi's announcement, the Governor of the Reserve Bank of India, Urjit Patel, and Economic Affairs secretary, Shaktikanta Das explained in a press conference that one purpose of the action was to fight terrorism funded by counterfeit notes. While the supply of notes of all denominations had increased by 40 percent between 2011 and 2016, the ₹500 and ₹1,000 banknotes increased by 76 percent and 109 percent, respectively, owing to forgery. They said that forged cash was used to fund terrorist activities against India and that the demonetisation had a counter-terrorism purpose.

Patel also informed that the decision had been made about six months ago, and the printing of new banknotes of denomination ₹500 and ₹2,000 had already started. However, only the top members of the government, security agencies and the central bank were aware of the move. But media had reported in October 2016 about the introduction of ₹2,000 denomination well before the official announcement by RBI. This statement has led to much debate, because the Reserve Bank governor six months before the announcement was Raghuram Rajan, while the new banknotes have the signature of the newly appointed governor, Urjit Patel.

Government ordinance

The Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 was issued by the Government of India on 28 December 2016 ceasing the liability of the government for the banned bank notes, and also imposing a fine upto ₹10,000 or five times the amount of the face value of the bank notes, whichever is higher, for people transacting with them after 8 November 2016; or holding more than ten of them after 30 December 2016. The ordinance also provided for the exchange of the bank notes after December 30 for non-resident citizens and others on a case by case basis.

However, Petrol, CNG and gas stations, government hospitals, railway and airline booking counters, state-government recognised dairies and ration stores, and crematoriums were allowed to accept the banned ₹500 and ₹1,000 bank notes until December 2, 2016.

Exchange of old notes

The Reserve Bank of India stipulated a window of fifty days until 30 December 2016 to deposit the demonetised banknotes as credit in bank accounts. The banknotes could also be exchanged over the counter of bank branches upto a limit that varied over the days:

All exchange of banknotes was abruptly stopped from 25 November 2016.

International airports were also instructed to facilitate an exchange of notes amounting to a total value of ₹5,000 for foreign tourists and out-bound passengers.

Facts and figures

Up to 97% of the demonetised bank notes have been deposited into banks which have received a total of ₹14.97 trillion ($220 billion) as of December 30 out of the ₹15.4 trillion that was demonetised. This is against the government's initial estimate that ₹3 trillion would not return to the banking system.

Of the ₹15.4 trillion demonetised in the form of ₹500 and ₹1000 bank notes of the Mahatma Gandhi Series, ₹9.2 trillion in the form of ₹500 and ₹2000 bank notes of the Mahatma Gandhi New Series has been recirculated as of 10 January 2017, two months after the demonetisation.

Withdrawal limits

Cash withdrawals from bank accounts were restricted to ₹10,000 per day and ₹20,000 per week per account from 10 to 13 November. This limit was increased to ₹24,000 per week from 14 November 2016.

A daily limit on withdrawals from ATMs was also imposed varying from ₹2,000 per day till 14 November, and ₹2,500 per day till 31 December. This limit was increased to ₹4,500 per day from January 1, and again to ₹10,000 from January 16, 2017. Limits placed vide the circulars cited above on cash withdrawals from Current accounts/ Cash credit accounts/ Overdraft accounts stand withdrawn with immediate effect. The limits on Savings Bank accounts will continue for the present and are under consideration for withdrawal in the near future. Limits vide the circulars cited above placed on cash withdrawals from ATMs stand withdrawn from February 1, 2017. However, banks may, at their discretion, have their own operating limits as was the case before November 8, 2016, subject to 2 (ii) above.

Exceptions

Under the revised guidelines issued on 17 November 2016, families were allowed to withdraw ₹2.5 lakh for wedding expenses from one account provided it was KYC compliant. The rules were also changed for farmers who are permitted to withdraw ₹25,000 per week from their accounts against crop loans.

Prior leakage of information

A fortnight before the official announcement, a news report in the Hindi daily Dainik Jagran quoting RBI sources mentioned about the coming release of new 2000 rupee note alongside withdrawal of 500 and 1000 rupee notes. Similar news came in The Hindu Business Line on 21 October 2016 which also mentions about coming 2000 rupee note and about possible withdrawal of 500 and 1000 rupee notes.

A businessman reportedly admitted in an interview that he had received prior warning of the impending demonetisation from a source in the government, and that he had sufficient time to convert most of his money into smaller denominations.

The chairman of the State Bank of India had also openly spoken in April 2016 about the possibility of demonetisation of ₹500 and ₹1000 notes.

A BJP MLA from Rajasthan, Bhawani Singh Rajawat, claimed in a video that 'Ambani and Adani' were informed about the demonetisation, and made arrangements. However, he later said that it was an off-the-record conversation, and officially denied the comments.

Allegations and claims

The Communist Party of India (Marxist) (CPM) alleged that the BJP unit in West Bengal had advance knowledge about the impending announcement, and deposited money just before the announcement. Aam Aadmi Party leader Arvind Kejriwal also claimed that there had been some leakage regarding the move. Kejriwal questioned how Sanjeev Kamboj, a BJP leader in Punjab, posted about the ₹2000 notes days before the official announcement, and alleged that a sudden spike in bank deposits between July and September 2016 was also due to information leakage. The Congress party demanded a probe into this huge jump in bank deposits before the demonetisation.

Nitish Kumar, Arvind Kejriwal and Rahul Gandhi alleged that the BJP made large purchases of land in Bihar ahead of the demonetisation because they had prior information.

More than 30 politicians belonging to the BJP were arrested and investigated for having unaccounted money in the new 2000 rupee denomination.

April fools joke

Seven months before the announcement, the Gujarati newspaper Akila published an article that "announced" the demonetisation of 500 and 1000 rupee notes. The editor of the newspaper claimed that it was only an April fools day prank. The article contained many details that matched the actual announcement in November, including the creation of new ₹2000 notes. The coincidence received wide coverage, and was called "mystical" and "uncanny."

Support

The decision met with mixed initial reactions. Several bankers like Arundhati Bhattacharya (Chairperson of State Bank of India) and Chanda Kochhar (MD & CEO of ICICI Bank) appreciated the move in the sense that it would help curb black money. Businessmen Anand Mahindra (Mahindra Group), Sajjan Jindal (JSW Group), Kunal Bahl (Snapdeal and FreeCharge) also supported the move adding that it would also accelerate e-commerce. Infosys founder N. R. Narayana Murthy praised the move.

Finance Minister Arun Jaitley said that demonetisation would clean the complete economic system, increase the size of economy and revenue base. He mentioned the demonetisation along with the upcoming Goods and Services Tax (GST) as "an attempt to change the spending habit and lifestyle."

The Indian National Congress spokesperson Randeep Surjewala welcomed the move but remained sceptical on the consequences that would follow. Chief Minister of Bihar Nitish Kumar supported the move. The demonetisation also got support from Chief Minister of Andhra Pradesh Nara Chandrababu Naidu. Former Chief Election Commissioner of India S. Y. Quraishi said demonetisation could lead to long term electoral reforms. Indian social activist Anna Hazare hailed demonetisation as a revolutionary step. The President of India Pranab Mukherjee welcomed the demonetisation move by calling it bold step. The opinion of the masses varied both ways on micro-blogs and social media sites like Twitter.

By and large, international response was positive which saw the move as a bold crackdown on corruption. International Monetary Fund (IMF) issued a statement supporting Modi's efforts to fight corruption by the demonetisation policy.

Chinese state media Global Times praised the move and termed it as "fierce fight against black money and corruption." Former Prime Minister of Finland and Vice-President of European Commission Jyrki Katainen welcomed the demonetisation move stressing that bringing transparency will strengthen Indian economy. BBC's South Asia Correspondent Justin Rowlatt in his article praised the move for its secrecy and success and elaborated on reason behind demonetisation. Tim Worstall termed the demonetisation as welcome macroeconomic effect in his article in Forbes magazine. Swedish Minister of Enterprise Mikael Damberg supported the move by calling it bold decision.

Singapore-based paper The Independent published a laudatory article on the move titled "Modi does a Lee Kuan Yew to stamp out corruption in India." Lee Kuan Yew was the Singaporean Prime Minister and is considered the architect of modern Singapore. "From making up his mind to rolling it out, a new Lee Kuan Yew is born in India. It will be reflected in the legacy of this Prime Minister," the article said.

Criticism

The Indian Supreme Court while hearing one among a slew of cases filed against the sudden demonetisation decision in various courts, observed that it "appears to be carpet bombing and not surgical strike" which government repeatedly claims it to be.

Nobel laureate Indian economist Amartya Sen, severely criticised the demonetisation move calling it a "despotic action" among other things.

Former Senior Vice-President and Chief Economist of the World Bank, Kaushik Basu, called it a 'major mistake' and said that the 'damage' is likely to be much greater than any possible benefits.

Pronab Sen, former Chief Statistician and Planning Commission of India member, called it a "hollow move" since it did not really address any of the purported goals of tackling black money or fake currency.

Prabhat Patnaik, a former professor of economics at the Jawaharlal Nehru University, Delhi called the move 'witless' and 'anti-people'. He criticised the simple way in which black money was assumed as "a hoard of cash", saying that it would have little effect in eliminating "black activities" while "causing much hardship to common people."

Noted economist and journalist, T. N. Ninan wrote in the Business Standard that demonetisation 'looks like a bad idea, badly executed on the basis of some half-baked notions'. Deepak Parekh (Chairman of HDFC) had initially appreciated the decision to ban the Rs. 500 and Rs. 1000 notes, but later said that the move had derailed the economy, and expressed skepticism about its outcome. Industrialist Rajiv Bajaj criticised the demonetisation, saying that not just the execution, but the concept of demonetisation was wrong in itself.

Chief Ministers of several Indian states like Mamata Banerjee, Arvind Kejriwal and Pinarayi Vijayan have criticised and led major protests against the decision in their states and in parliament. Initially, the move to demonetise and try to hinder black money was appreciated, but the manner in which it was carried out by causing hardships to common people was criticised. A Public Interest Litigation (PIL) was filed in Madras High Court by M Seeni Ahamed, General Secretary of the Indian National League, to scrap the decision. The High Court dismissed the PIL stating that it could not interfere in monetary policies of the government. Similar PILs were also filed in the Supreme Court of India. Supreme Court of India is yet to decide on the matter. It is listed for hearing on 2 December 2016.

Several government ministers had declared before the demonetisation that they were holding large amounts of cash, including Arun Jaitley, who had more than 65 lakh rupees in cash. This led to speculation about whether and when the ministers had deposited the cash they held.

Steve Forbes described the move as 'Sickening And Immoral'. He stated that "What India has done is commit a massive theft of people's property without even the pretense of due process--a shocking move for a democratically elected government." Nobel laureate Paul Krugman said that it is difficult to see gains from demonetisation, while there may be significant costs to it.

The demonetisation also came in for sharp criticism from media outside India, with the New York Times saying that the demonetisation was "atrociously planned" and that it did not appear to have combatted black money, while an article in The Guardian stated that "Modi has brought havoc to India". The Harvard Business Review called it "a case study in poor policy and even poorer execution" The frequent change in the narrative on objectives of the demonetisation to its visible impact on the poorest of the poor made other critiques calling government's narrative as spins in view of the "pointless suffering on India's poorest."

Opposition

A Congress-led opposition which includes 13 political parties, opposed the current government on the demonetisation issue in the Winter Session of the Indian Parliament on 16 November 2016. The Chief Minister of West Bengal Mamata Banerjee also met the President Pranab Mukherjee to oppose the demonetisation. The debate on demonetisation is known to be initiated by Indian National Congress and Anand Sharma in the Rajya Sabha on 16 November 2016, while Banerjee is known to be the first to oppose the current government on the demonetisation.

On 16 November 2016, Banerjee led a rainbow delegation comprising political parties of Trinamool Congress, Aam Aadmi Party, BJP ally Shiv Sena, Patidar Anamat Andolan Samiti (of Hardik Patel) and National Conference to Rashtrapati Bhawan to protest against the decision to withdraw the ₹500 and ₹1000 banknotes. A memorandum was submitted to the President of India Pranab Mukherjee demanding rollback of the decision. Outside the Parliament in a rally the same day, Saugata Roy, a member of parliament from the opposition Trinamool Congress Party, commented, "People are in utter distress, especially the informal sector is totally disrupted. Poor people, daily wage earners, they're all facing difficulty."

In the demonetisation debate on the first day of the winter session of Parliament at the Rajya Sabha, Pramod Tiwari from the Indian National Congress compared Narendra Modi to Benito Mussolini, Adolf Hitler and Muammar Gaddafi. Prem Chand Gupta, a member of the Rashtriya Janata Dal, questioned a statement of Modi from the unscheduled TV broadcast on 8 November, "If it was planned 10 months ago, how did RBI Governor Urjit Patel sign on new note?". Praful Patel, a member of the Nationalist Congress Party, stated that "the government was not even prepared to recalibrate the ATMs while announcing the move. People's suffering are unimaginable. Nobody is questioning the government's intention, but you are unprepared to execute the move". Later, the former Chief Minister of Uttar Pradesh Mayawati Prabhu Das stated the situation to "a financial emergency", by saying "It looks as if Bharat has shut down." Also, Sitaram Yechury from Communist Party of India, questioned the government on the demonetisation move by stating "only 6% of black money in India is in cash to drive his point that demonetisation won't curb illicit wealth."

On 17 November 2016, in a rally against demonetisation of ₹500 and ₹1000 notes, led by the Chief Minister of Delhi Arvind Kejriwal and his West Bengal counterpart Mamata Banerjee at Azadpur Mandi, the biggest vegetable and fruits wholesale hub in the national capital; Kejriwal demanded the withdrawal of demonetisation in 3 days. Banerjee also stated "I give the government 3 day ultimatum, fix things or withdraw the demonetisation scheme".

In the demonetisation debate on the second and third day of the Winter Session of Parliament, on 17 and 18 November 2016, the opposition and the government clashed over the demonetisation issue, bringing the house to continuous halts.

On 24 November 2016, in the demonetisation debate, the former prime minister of India Manmohan Singh said "this scheme will hurt small industries, the farming sector. The GDP can decline by about 3 per cent due to this move", while he also questioned "I would like to ask the Prime Minister examples of countries where people have deposited their money in the banks and not allowed to withdraw their own money." and later also said "It is no good that on each day banks bring out new notifications. It doesn't reflect properly on Prime Minister's Office, Finance Minister and the Reserve Bank of India. Cooperative banking system has been prevented from handling cash". Singh at last termed the demonetisation move as an "organised loot, legalised plunder of the common people".

Strikes

As the demonetisation was opposed in both houses of the parliament, it triggered organised nationwide strikes across India. Opposition parties like Indian National Congress, Bahujan Samaj Party, Trinamool Congress, DMK, JD(U), AIADMK, Nationalist Congress Party, Left, Rashtriya Janata Dal and the Samajwadi Party decided to observe ‘Akrosh Diwas’ as, a protest campaign day on November 28 and launch protests in front of banks, demanding that money be returned to people. In the state of Bihar, 15 trains were blocked and stranded, while the states of West Bengal, Maharashtra and Uttar Pradesh saw protest marches and rallies led by opposition parties. In the state of Kerala, shops and business establishments were shut, with school and colleges closed throughout the state, while movements of private vehicles were also disrupted in Northern Kerala.

The Congress party has decided to launch a nationwide movement to expose the "biggest scam" of independent India, said spokesperson leader Randeep Surjewala on 31 December 2016. The first phase would take place from January 1–10, second phase from January 11–20 and third phase from January 20–30.

Banking

In the first four days after the announcement of the step, about ₹3 trillion (US$45 billion) in the form of old ₹500 and ₹1,000 banknotes had been deposited in the banking system and about ₹500 billion (US$7.4 billion) had been dispensed via withdrawals from bank accounts, ATMs as well as exchanges over the bank counters. Within these four days, the banking system has handled about 18 crore transactions. The State Bank of India reported to have received more than ₹300 billion (US$4.5 billion) in bank deposit in first two days after demonetisation. A spike in the usage of debit card and credit card post demonetisation was also reported.

Between November 10 and November 27, banks reported exchange and deposits of demonetised banknotes worth ₹8.45 trillion (US$130 billion) (exchange of ₹339.48 billion (US$5.0 billion) and deposits of ₹8.11 trillion (US$120 billion)). During this period, an amount of ₹2.16 lakh crore (US$32 billion) had been withdrawn by people from their accounts.

In Malda, a district believed to be a transit-point for fake Indian currencies, a large sum of cash deposits in dormant accounts were also reported. According to The Economic Times, more than 80 percent of fake currency in India originates from Malda district in West Bengal.

Human trafficking

Nobel laureate Kailash Satyarthi and others working to fight human trafficking said that the note ban had led to a huge fall in sex trafficking. Satyarthi said the demonetisation would be effective in combating exploitation of children as well as corruption and would be a great obstacle to traffickers. However, 2 months later he expressed his disappointment on Rs 2000 notes being pushed into human trafficking in absence of other concrete steps.

Radical groups

The Demonetisation has badly hit Maoist and Naxalites as well. The surrender rate has reached its highest since the demonetisation is announced. It is said that the money these organisations have collected over the years have left with no value and it has caused them to reach to this decision.

The move also reportedly crippled Communist guerrilla groups (Naxalites) financing through money laundering. On 10 November the police arrested a petrol pump owner at Ranchi when he reportedly tried to deposit ₹2.5 billion, belonging to a person affiliated with the banned Communist Party of India (Maoist). According to Chhattisgarh Police demonetisation has affected the Naxalite activities. It is reported that insurgents have stashed more than ₹70 billion in the Bastar region.

While Manohar Parrikar claimed that the move has also helped in reducing the incidents of stone-pelting in the Kashmir valley, his claim has been disputed.

Hawala

Mumbai Police reported a setback to Hawala operations. Hawala dealers in Kerala were also affected. The Jammu and Kashmir Police reported the effect of demonetisation on hawala transactions of separatists.

Railways

As of November 2016, Indian Railways did not have the option to make payment with cards at the counters. After the demonetisation move, the government announced to make card payment options available at railway counters in the country. The railways placed an order for 10,000 card reader machines in January 2017.

Cash shortage

The scarcity of cash due to demonetisation led to chaos, and most people holding old banknotes faced difficulties exchanging them due to endless lines outside banks and ATMs across India, which became a daily routine for millions of people waiting to deposit or exchange the ₹500 and ₹1000 banknotes since 9 November. ATMs were running out of cash after a few hours of being functional, and around half the ATMs in the country were non-functional. Sporadic violence was reported in New Delhi, but there were no reports of any grievous injury, people attacked bank premises and ATMs, and a ration shop was looted in Madhya Pradesh after the shop owner refused to accept ₹500 banknotes.

The CMD of Punjab National Bank said that panic after demonetisation started fading on 19 November 2016. As of 18 December 2016, there were still long queues at banks and ATMs. Three months after the withdrawal of banknotes, a quarter of the ATMs were still short of cash.

Deaths

Several people were reported to have died from standing in queues for hours to exchange their old banknotes. Deaths were also attributed to lack of medical help due to refusal of old banknotes by hospitals. As of 15 November 2016, the attributed death toll was 25. and 33 deaths as of 18 November. In an interview, Chief Minister of Delhi Arvind Kejriwal lashed out at a BBC reporter who asked him to justify his 19 November claim that 55 deaths were linked to demonetisation. By the end of the year, opposition leaders claimed that over 100 people had died due to demonetisation.

Stock market crash

As a combined effect of demonetisation and US presidential election, the stock market indices dropped to an around six-month low in the week following the announcement. The day after the demonetisation announcement, BSE SENSEX crashed nearly 1,689 points and NIFTY 50 plunged by over 541 points. By the end of the intraday trading section on 15 November 2016, the BSE SENSEX index was lower by 565 points and the NIFTY 50 index was below 8100 intraday.

Transportation halts

After the demonetisation was announced, about 800,000 truck drivers were affected with scarcity of cash, with around 400,000 trucks stranded at major highways across India were reported. While major highway toll junctions on the Gujarat and Delhi-Mumbai highways also saw long queues as toll plaza operators refused the old banknotes.

Nitin Gadkari, the Minister of Transport, subsequently announced a suspension of toll collections on all national highways across India until midnight of 11 November, later extended until 14 November and again until midnight of 18 November, and yet again till 2 December.

Agriculture

Transactions in the Indian agriculture sector are heavily dependent on cash and were adversely affected by the demonetisation of ₹500 and ₹1,000 banknotes. Due to scarcity of the new banknotes, many farmers have insufficient cash to purchase seeds, fertilisers and pesticides needed for the plantation of rabi crops usually sown around mid-November. Farmers and their unions conducted protest rallies in Gujarat, Amritsar and Muzaffarnagar against the demonetisation as well as against restrictions imposed by the Reserve Bank of India on district cooperative central banks which were ordered not to accept or exchange the demonetised banknotes.

The demonetisation led to unavailability of cash to pay for food products. The reduction in demand that arose in turn led to a crash in the prices of crops. Farmers were unable to recover even the costs of transportation from their fields to the market from the low prices offered. The prices dropped as low as 50 paise per kilo for tomatoes and onions. This forced the farmers across the country to dump their products in desperation. Some farmers resorted to burying unsold vegetables. Agricultural produce such as vegetables, foodgrains, sugarcane, milk and eggs were dumped on roads. Some farmers dumped their produce in protest against the government.

Business

By the second week after demonetisation of ₹500 and ₹1,000 banknotes, cigarette sales across India witnessed a fall of 30–40%, while E-commerce companies saw up to a 30% decline in cash on delivery (COD) orders. Several e-commerce companies hailed the demonetisation decision as an impetus to an increase in digital payments. They believe that it would lead to a decline in COD returns which is expected to cut down their costs.

The demand for point of sales (POS) or card swipe machines has increased. E-payment options like PayTM and Instamojo Payment Gateway, PayUMoney has also seen a rise. According to data of Pine Labs, the demand for its POS machines doubled after the decision. Further it states that the debit card transactions rose by 108% and credit card transactions by 60% on 9 November 2016.

Forecast of GDP growth rate

Global analysts cut their forecasts of India's GDP growth rate due to demonetisation. India's GDP in 2016 is estimated to be US$2.25 trillion, hence, each 1 per cent reduction in growth rate represents a shortfall of US$22.5 billion (Rs. 1.54 lakh crores) for the Indian economy. According to Societe Generale, India's quarterly GDP growth rates would drop below 7% for an entire year at a stretch for the first time since June 2011.

Drop in industrial output

There was a reduction in industrial output as industries were hit by the cash crisis. The Purchasing Managers' Index (PMI) fell to 46.7 in November from 54.5 in October, recording its sharpest reduction in three years. A reading above 50 indicates growth and a reading below shows contraction. This indicates a slowdown in both, manufacturing and services industries. The PMI report showed also showed that the reduction in inflation in November was due to shortage in money supply.

The growth in eight core sectors such as cement, steel and refinery products, which constitute 38% of the Index of Industrial Production (IIP), was only to 4.9 percent in November as compared with 6.6 percent in October.

Income tax raids and cash seizures

The Finance Ministry instructed all revenue intelligence agencies to join the crackdown on forex traders, hawala operators and jewellers besides tracking movement of demonetised currency notes. It was reported that the Prime Minister's Office (PMO) and the Prime Minister Modi himself were directly coordinating the raids conducted by the Income Tax, Enforcement Directorate (ED) and other agencies. As of 23 December, PMO received around 700 calls giving information about black money and it directly forwarded the information to various law enforcement agencies for further action.

Income Tax departments raided various illegal tax-evasive businesses in Delhi, Mumbai, Chandigarh, Ludhiana and other cities that traded with demonetised currency. The Enforcement Directorate issued several FEMA notices to forex and gold traders. Large sum of cash in defunct notes were seized in different parts of the country. In Chhattisgarh liquid cash worth of ₹4.4 million (US$65,000) was seized.

As of December 28, official sources said that the Income Tax department detected over ₹4,172 crore of un-disclosed income and seized new notes worth ₹105 crore as part of its country-wide operations. The department carried out a total of 983 search, survey and enquiry operations under the provisions of the Income Tax Act and has issued 5,027 notices to various entities on charges of tax evasion and hawala-like dealings. The department also seized cash and jewellery worth over ₹549 crore out of which the new currency seized (majority of them ₹2000 notes) is valued at about ₹105 crore. The department also referred a total of 477 cases to other agencies like the CBI and the Enforcement Directorate (ED) to probe other financial crimes like money laundering, disproportionate assets and corruption.

Seizures of ₹2000 notes

Huge amounts of cash in the form of new notes were seized all over the country after the demonetisation. As of December 2016, over 4 crore in new banknotes of ₹2000 were seized from four persons in Bangalore, ₹33 lakh in ₹2000 notes were recovered from Manish Sharma, an expelled BJP leader in West Bengal, and ₹1.5 crore was seized in Goa. 900 notes of the new ₹2000 notes were seized from a BJP leader in Tamil Nadu. Around ₹10 crore in new notes were seized in Chennai.

As of 10 December, ₹242 crore in new notes had been seized. It was noted in the media that while people were dying in queues to obtain a few thousand rupees in cash, persons with the right connections were able to amass crores of rupees in new notes, thus rendering the demonetisation exercise futile.

It was announced by the government that the seized notes will be brought into the mainstream as soon as possible to ease out the cash problem. Earlier, agencies kept all seized material, including cash seizures, in their strong rooms as evidence till the case was adjudicated by the courts. The seized money was then deposited into the Consolidated Fund of India. Sometimes, income tax cases took years to resolve, still all seized material was kept in safe lockers of the tax department.

Job losses

There was a loss of jobs due to demonetisation, particularly in the unorganised and informal sector and in small enterprises.

Gold purchases

In Gujarat, Delhi and many other major cities, sales of gold increased on 9 November, with an increased 20 to 30% premium surging the price as much as ₹45,000 (US$670) from the ruling price of ₹31,900 (US$470) per 10 grams (0.35 oz).

Income Tax officials raided multiple branches of Axis Bank and found bank officials involved in money laundering acts, exchanging old notes for gold.

Donations in temples

In India, the cash deposited into hundis, or cash collection boxes in temples and gurudwaras are exempted from inquiry by the tax department. This exemption is sometimes misused to launder money. After the note ban, there was a spike in donations in the form of the demonetised notes in temples. Authorities of Sri Jalakanteswarar temple at Vellore discovered cash worth ₹4.4 million (US$65,000) from the temple hundi in the form of defunct notes.

Multiple bank transactions

There have been reports of people circumventing the restrictions imposed on exchange transactions by conducting multiple transactions at different bank branches and also sending hired people, employees and followers in groups to exchange large amounts of banned currency at banks. In response, the government announced that it would start marking customers with indelible ink. This was in addition to other measures proposed to ensure that the exchange transactions are carried out only once by each person.

Railway bookings

As soon as the demonetisation was announced, it was observed by the Indian Railways authorities that a large number of people started booking tickets particularly in classes 1A and 2A for the longest distance possible, to get rid of unaccounted cash. A senior official said, "On November 13, 42.7 million passengers were nationally booked across all classes. Of these, only 1,209 were 1A and 16,999 for 2A. It is a sharp dip from the number of passengers booked on November 9, when 27,237 passengers had booked tickets in 1A and 69,950 in 2A."

The Railways Ministry and the Railway Board responded swiftly and decided that cancellation and refund of tickets of value ₹10,000 and above will not be allowed by any means involving cash. The payment can only be through cheque/electronic payment. Tickets above ₹10,000 can be refunded by filing ticket deposit receipt only on surrendering the original ticket. A copy of the PAN card must be submitted for any cash transaction above ₹50,000. The railway claimed that since the Railway Board on 10 November imposed a number of restrictions to book and cancel tickets, the number of people booking 1A and 2A tickets came down.

Municipal and local tax payments

As the use of the demonetised notes had been allowed by the government for the payment of municipal and local body taxes, it led to people using the demonetised ₹500 and ₹1,000 notes to pay large amounts of outstanding and advance taxes. As a result, revenue collections of the local civic bodies jumped. The Greater Hyderabad Municipal Corporation reported collecting about ₹1.6 billion (US$24 million) in cash payments of outstanding and advance taxes, within 4 days.

The tax collection by local bodies have surged over 260% and more than 15000 crore mare after 14 days of demonetization. The total indirect tax collection rose to 14.2% only in the month of December according to Finance Minister Arun Jaitley.

Backdated accounting

The Enforcement Directorate raided several forex establishments making back dated entries. Money laundering using backdated accounting was carried out by co-operative banks, jewellers, sellers of iPhones, and several other businesses.