#Demonetisation and despite a lot of public support by the public who are against the Black Money Hoarders and Counterfeiters, there are political parties that are strongly criticising the move. The three charts below show that the opposition has no leg to stand on except that common man is suffering, which is yes to a certain extent, but in no way any kind of catastrophe.
In the aftermath of the global financial crisis in 2007-08, the UPA government disregarded the FRBM (Fiscal Responsibilities and Budget Management Act) and went on a spending spree in order to spur the economy. The spending spree resulted in the government debt ballooning by over 4x and fiscal deficit as percentage of GDP doubling. The large infusion of cash through fiscal pump priming resulted in currency in circulation, which is the Rs 500 and Rs 1000 notes, rising over 3x. Bank deposits too rose, keeping the currency in circulation to bank deposit ratio almost constant.
The sharp rise in currency in circulation was caused by three factors a) Inflation running at double digit levels b) Sharp rise in real estate prices and c) Sharp rise in bank lending. Rise in inflation required households keep more cash to pay for day to day consumables. Real estate boom with prices rising multifold in the 2008- to 2012 period saw a huge flow of unaccounted money into the sector. Bank lending at around 20% growth year on year in the 2009 to 2012 period lead to many promoters siphoning off money before starting to default on loans. Banks are now paying the price for that lending.
The huge currency liquidity also gave opportunity for counterfeiters to do their bit, flooding the system with spurious notes. RBI had a huge problem in identifying and managing the counterfeit notes. Scams such as 2G, Irrigation Scams also led to a lot of unaccounted money.
Demonetisation in one stroke has negated the need for cash for households as inflation is kept in check, taken out all black money in real estate transaction and also has to some extent punished unscrupulous promoters and politicians who fleeced the banking system.
Going forward, a fiscally prudent government coupled with more vigilant IT departments and strong anti corruption laws will keep down unaccounted money in the system.